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Papers - ICIBE - Gümüşhane Üniversitesi
What Others Manifest?
THE WORLD ECONOMY IN THE THEORETICAL TURBULENCE OF GLOBAL FINANCIAL CRISIS
Edited by
İhsan Günaydın and Hilmi Erdoğan Yayla
ISBN 978-605-61345-0-0 (Print Edition)
ISBN 978-605-61345-1-7 (Adobe eReader Format)
Gümüşhane
University
Press
WHAT OTHERS MANIFEST?
THE WORLD ECONOMY IN THE THEORETICAL TURBULENCE OF GLOBAL FINANCIAL CRISIS
Edited by
İhsan Günaydın and Hilmi Erdoğan Yayla
© 2010 Gümüşhane University Press
What Others Manifest? The World Economy in the Theoretical Turbulence of Global
Financial Crisis - Edited by İhsan Günaydın and Hilmi Erdoğan Yayla
First Edition 2010
Gümüşhane University Press
Bağlarbaşı Mahallesi 29000
Gümüşhane Üniversitesi / Türkiye
www.gumushane.edu.tr
Tel: +90 456 2337425
Fax: +90 456 233 7427
An imprint of Universal Publication Ltd.
Doktorlar İşhanı Karşısı No:1
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Front Cover Images produced by Faruk Akbaş
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ISBN 978-605-61345-0-0 (Print Edition)
ISBN 978-605-61345-1-7 (Adobe eReader Format)
The material in this book is copyrighted. No part of this book may be utilized in any form
without permission from the publishers. For permission to reprint or reproduce please send
an electronic request to [email protected]
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
CONTENTS
Foreword
viii
Contributors and Reviewers
ix
Papers
1
The Impact of the Global Financial Crisis on Remittancing: Implications for
Developing Countries
Indianna D. Minto-Coy
2
The Impact of the Global Financial Crisis on Georgia’s Investment: Threat of
Slowing Down Investment Flows After Ossetia – Georgian War.
Tea Kbiltsetskhlashvili
19
Stormy Balkans: Perceptions of Safety Culture and Social Change in Greece
and Serbia
Charalampos Mitsidis
40
Infrastructure and Recovery from Global Crisis: Employment, Output, and
Investment Strategy
Cem Berk
70
Globalizing Financial Systems and Economic Growth in the Middle East
Region
Anas Al Bakri
87
The Effect of Company Ownership on the Timeliness of Financial Reporting:
Empirical Evidence from Malaysia
Iszmi Ishak
Ahmad Subhi Muhammad Sidek
Azwan Abdul Rashid
102
Crestfallenness of Nations: An Inquiry on Reasons of the Global Financial
Crisis
Muhammet Şahin
120
Confounding in the Interaction of the Global Financial Crisis with the Real
Sector: Economic Fundamentals and Effect of Redistribution on the
Keynesian Multiplier
Piero Benazzo
136
iii
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Did the Securitization Contribute to the Release of the Subprime Crisis?
Empirical Investigation for American Banks
Ons El Gaied
Chaker Aloui
Ousama Ben Salha
148
Turkey’s Renewable Energy Sources in the Global Financial Crisis
Mehmet Yumurtacı
Ali Keçebaş
Mehmet Ali Alkan
166
A Time to Love and a Time to Die: An Interpretation of Global Integration of a
Public Sector Jute Mills as an Export Processing Zone
Fahreen Alamgir
173
One-way Cross-network Externality and Determinants of Payment Card
Usage in China
Pinliang Luo
Linhui Yu
Chong Han
185
Accelerated Dynamics of Credit in Selective Countries from Central, Eastern
and South-Eastern EU Member States and Implications of the Current
Financial Crisis
Roman Angela
Anton Sorin Gabriel
195
Biplot Representation of the Financial Investment Returns
Afşin Şahin
Barış Alkan
Yılmaz Akdi
Cemal Atakan
217
Reconciling Profit and Social Development in Osigwe Anyiam-Osigwe’s
Business Ethics
Adebola B. Ekanola
229
European Employment Strategy and Turkey’s Employment Policies
Özgür Öngöre
243
The Influence Of Expressway Construction Scale on Toll Fare From the View
of Economics
Chen Jingyuan
Xue Xue
263
iv
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Ambush Marketing: A Research to Specify Consumer’s Knowledge About
Ambush Marketing
Emel Özgenç
Hasan Ayyıldız
269
Influences of Organisational Commitment on Quality of Work Life: An
Empirical Study
Upasna Joshi
283
The Financial Implications of Globalization on the Islamic Banking System:
Facts and the Events
Mohammad Salim AL-Rawashdah
293
Marketing Management During Crisis
Ömer Akat
İsmail Dülgeroğlu
307
The Relation Between Performance-based Budgeting and Cost Management
Mehdi Zeynali
Ata Farzamian
Saber Farshibenab
315
Sustainable Development, Offshoring and Supply Chain Management in
Different Angle at a Glance
Oktay Orçun Beken
329
Estimating the Demand for Money in Libya Using Autoregressive Distributed
Lag (ARDL)
Said Yousif Khairi
Ragib Mansour Elwerfeli
Khaled Elbeydi
341
Customers’ Credit Card Selection Criteria In Perspective Of An Emerging
Market
Babar Zaheer Butt
Kashif ur Rehman
M Iqbal Saif
Nadeem Safwan
346
SWOT Analysis of Homo Economicus Through Global Financial Crisis
Renata Prokeinova
358
Global Financial Crises: Impact and Responses from India
Viju Mathew
363
v
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Sustainability of Finance Advantage to Achieve Company Competitive
Strategy Under The Financial Crisis: Haier as A Case Study
Guo Yue
Yang Qing
370
How Emerging Economies Rebound From the Global Financial Crisis:
Evidence from China and India
Nir Kshetri
380
Anatomy of Crisis management: A Case Study Focusing on Major Crisis
within India
Manisha Shekhar
390
Strengthening of Operations and Contracts in Islamic Finance in the Middle
East Region
Anas A. Al-Bakri
Somar M. Al-Mohamad
406
An Empirical Study Investigating the Teaching of Renewable Energy Sources
Which Are Important in the Global Financial Crisis Environment at
University Level
Abdurrahman Karabulut
Mehmet Ali Alkan
420
Abstracts
428
A Human-Centered Alternative Socioeconomic Overview Of The Global
Crisis And Proposed Solutions
Orhan Küçük
Nurten Küçük
428
Global Crisis, Local Jobs: The Effects Of The Economic Crisis On Local
Labour Market In Turkey (The Case Of Bursa)
Özlem Işığıçok
Burak Faik Emirgil
433
Strategic Cost Management Under Uncertainty: A Multidimensional
Approach to Product Life Cycle Costing
Rıfat Yılmaz
434
The Views of Employees and Employers in Turkey on Labour Issues during
the Last Global Financial Crises: A Critical Discourse Analysis
Fuat Man
Cemal İyem
435
vi
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Impact of Global Financial Crisis on Bangladesh Garments Industry
Touhidul Islam
436
Local Effects Of Gfc, Perspective Of Turkish Tourism Sector: Past, Present
And Future
Derya Özilhan
Alper Veli Çam
İbrahim Akgöbek
Handan Çam
437
International Trade Under Crisis Constraints
Alexandru Trifu
438
vii
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
FOREWORD
The First International Conference on Critical Issues in Business and Economics (ICIBE) was
held in Gümüşhane, Turkiye on 5-6 November 2009. The purpose of this annual conference is
to establish an academic forum for substantive dialogue among researchers to exchange their
ideas and researches about critical aspects of business and economics.
2009’s theme was “What Others Manifest?” and was focused on the issues that the world
economy has been facing by Global Financial Crisis (GFC) since 2007. This book contains
most of the papers presented at the conference and they cover various critical topics which
focus on global financial crisis from the perspective of different cultures, countries and
settings.
Many colleagues were engaged in making the 2009 conference a success. The greatest debt is
to the authors. We also would like to thank to reviewers and faculty staff for their support and
devoting time to make this event available.
İhsan Günaydın
Hilmi Erdoğan Yayla
viii
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Contributors and Reviewers
Lisa Adkins, Goldsmiths University
Nalan Akdoğan, Başkent University
Ahmet Albayrak, Gümüşhane University
Marcia Annisette, York University
Maria Thereza Antunes, MacKenzie University
Aylin Poroy Arsoy, Uludağ University
Sinan Artun, Gümüşhane SMMMO
Hasan Ayyıldız, Karadeniz Technical University
Bernardo Batiz-Lazo, Leicester University
Ercan Bayazıtlı, Ankara University
Niyazi Berk, Bahçeşehir University
Salvador Carmona, Instituto Empresa
Garry Carnegie, Ballarat University
Ekrem Cengiz, Gümüşhane University
Nuran Cömert, Marmara University
Yavuz Çiftci, Muğla University
Bünyamin Er, Karadeniz Technical University
Fatih Coşkun Ertaş, Gaziosmanpaşa University
Ümit Gücenme, Uludağ University
Kadir Gürdal, Ankara University
Eymen Gürel, Adnan Menderes University
Cemal İbiş, Marmara University
Mevlüt Karakaya, Gazi University
Uğur Kaya, Karadeniz Technical University
Fazıl Kırkbir, Karadeniz Technical University
Arjo Klamer, Erasmus University
Ganite Kurt, Gazi University
Nazım Kuruca, Giresun University
Marta Macias, Carlos III University
Beyhan Marşap, Gazi University
Marc Massoud, Claremont McKenna College
Octavio Mendonca, MacKenzie University
Ufuk Mısırlıoğlu, University of the West England
Indiana Minto-Coy, University of Waterloo
Ons El Gaied, University of Sousse
Ferhat Özbek, Gümüşhane University
Recep Pekdemir, İstanbul University
Lucia Lima Rodriguez, Universidade do Minho
Massimo Sargiacomo, Università Studi G.Dánnuzio
Güven Sayılgan, Ankara University
Kemal Saylan, Gümüşhane University
Yakup Selvi, İstanbul University
Goran Svensson, Oslo School of Management
Cengiz Şeker, Gümüşhane University
Hülya Talu, İstanbul University
Mehmet Hanefi Topal, Gümüşhane University
Alexandru Trifu, University ,,Petre Andrei” of IASI
Barış Yıldız, Gümüşhane University
Salih Yıldız, Gümüşhane University
ix
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
_______________________________________________________________
Papers
__________________________________________________________________________
1
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Indianna D. MINTO-COY
Centre for International Governance Innovation &
University of Waterloo, Canada
[email protected]
[email protected]
THE IMPACT OF THE GLOBAL FINANCIAL CRISIS ON REMITTANCING:
IMPLICATIONS FOR DEVELOPING COUNTRIES
Abstract
Remittancing is increasingly seen as the bedrock of the diaspora’s contribution and
engagement with the home country. Remittancing is, however, vulnerable to the fortunes of
migrants who are in turn susceptible to fluctuations in the economies in which they are based.
These locations tend to be the more developed or industrialized nations in the world.
Unfortunately, these are among the nations that have been most adversely and directly hit by
the global financial crisis of 2007-2009. This discussion aims to assess the real and potential
impact of this downturn at the macro and micro level. It investigates the impact of the GFC on
remittancing and the implications for the increasing dependence on this source of development
funds. It is proposed that the downturn has highlighted the risks of basing development on
financial returns from the Diaspora and that a reliance on remittancing indicates the continuing
inability of many countries to provide opportunities at home. Nonetheless, the performance of
remittancing, compared to other economic indicators, does suggest that this is a resilient
source of income which can be scaled up for long term household and national development.
The chapter therefore, argues for more diversification in the way such funds and importantly,
diaspora talents and resources are utilized. To this end, it calls for specific attention to the
boundary-crossing capabilities of diasporas and involving this group more entrepreneurially in
areas such as private diplomacy, marking one way in which developing countries can build
resilience in the face of global economic and political uncertainty.
Keywords: Remittancing, Diaspora, Development.
1. Introduction
Diaspora studies have received much attention in recent times with research and debate
focusing on migrants and the role that this group plays in development.1 Added attention has
come from the increasing contribution of diasporas to their home countries2, with
remittancing3 forming the bedrock of this increased contribution. For this reason, the area of
remittancing has become one of the focal points in diaspora studies with governments in the
host and home countries4, international agencies, among others, emphasising the value of this
growing source of income in assisting some of the poorest countries in the world to cope
economically.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Remittancing is, however, vulnerable to the fortunes of migrants whom are in turn susceptible
to fluctuations in the economies in which they are based. These locations tend to be the more
developed or industrialized nations in the world. Unfortunately, these are among the nations
that have been most adversely and directly affected by the global financial crisis (GFC) of
2007-2009.
With this in mind, this chapter aims to examine the effect of the GFC on remittancing. It also
aims to capture and investigate some of the issues which have been exposed by this crisis,
particularly as it relates to remittancing and development. In so doing it assesses how
countries can learn from this experience. This will be achieved through a case study of
Jamaica, a small developing Caribbean island-state lying 90 miles south of Cuba and 581
miles south east of Miami.
Jamaica makes a good case given its long history with migration and growing dependence on
remittances. The emphasis on Jamaica does not, therefore, negate the value of the findings for
other developing countries and regions that depend on remittancing. Indeed, remittancing is a
growing industry worth an estimated $443 billion with developing countries in regions such as
Europe, Africa and Asia being some of the areas that benefit most from this industry. 5 Thus,
the Jamaican case is arguably a microcosm of the global experience.6
The rest of the discussion will be organized as follows. Section 2 outlines the growth and
emergence of the Jamaican diaspora and the trends in remittancing, which much reflects the
broad tendencies in many other developing economies. The main discussion will be taken up
in Section 3 which examines the effect of the GFC and the implications for remittancing as a
source of development funding. An attempt is made throughout the discussion to relate the
findings to the experiences of other countries in this and other sections of the paper.
Recommendations are also offered for countries aiming to make the most from remittances at
the family, community, national and international levels. Section 4 is comprised of a summary
and conclusion.
2. Emergence and Growth of the Jamaican Diaspora
The world’s migrant population has grown significantly over the years.7 With this increase in
size has come increased attention due to the steady growth in remittance figures globally.
Added attention has also come from the diaspora who are demanding an increased voice and
participation in home country affairs due to this form of economic contribution. The work of
academics and multilateral institutions such as the United Nations, World Bank (WB) and
International Monetary Fund (IMF) has also brought this group further into the spotlight.8 The
‘diaspora option’ which involves the use of the diaspora as a developmental tool for the home
country has, for instance, been encouraged by institutions such as the IMF and WB. Increased
attention has also come from developing countries themselves, where national governments
are increasingly seeking ways of engaging with their diaspora and leveraging diasporic
resources for development. Among these states are the islands of the Caribbean and
specifically, Jamaica, where the government has within the last decade sought to introduce
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
various measures to attract the diaspora’s attention (and money) and give them more role in
national policy (Minto-Coy, forthcoming).
The diaspora option has been particularly salient in Jamaica given the historical relevance of
migration in a country that has witnessed colonialism and slavery from the Fifteenth Century;
forces which significantly influenced the development of modern capitalism and the
international trade system. Immigration has since been replaced by emigration with an
estimated 2.6 million Jamaicans living in countries such as the US, UK and Canada. Indeed,
this is a significant number for an island with a local population of approximately 2.8 million
existing on a land space of almost 4,111 square miles. The Caribbean as a whole has been said
to have been, “more deeply and continuously affected by migration than any other region in
the world” (Foner, 1998, p.47).9 As such, the rationale for migration here corresponds with
that for other countries where peoples migrate in search of better economic opportunities and
livelihoods.
3. Recent Trends in Remittancing
Remittance Infow (Millions of U$)
As with the rest of the region and the world, the hallmark of the diaspora’s contribution to
Jamaica has been in the form of remittances which have over the years shown a steady
increase, as illustrated in Figure 1.
Figure 1
Jamaica: Remittance Inflows 2001-2008
2500
2000
1500
1000
500
4
2008
2007
2006
2005
2004
2003
2002
2001
0
Year
Source: Minto (2009) and Bank of Jamaica (2009)
This increase has been welcomed, given the declining value of industries such as, bauxite and
agriculture and the sustained fall off in Official Development Assistance (ODA).10 Increasing
pressures on the national budget and dwindling government capacity to provide opportunities
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
and security for its citizens have also emphasized migration as a route to self-actualisation. In
turn, this has elevated the place of remittance funds in social welfare provision and in enabling
more sustainable livelihoods among local households and communities, the majority of which
are among the island’s poorest.
Remittancing has thus emerged as an important contributor to the Jamaican economy. Such a
reality becomes even more obvious when remittancing is considered alongside a number of
other economic indicators. Table 1 shows that remittances rival, and have more recently,
overtaken tourism as the largest source of foreign exchange and far exceeds the level of
Foreign Direct Investments (FDI) to the island. Table 2 highlights this information, further
indicating that the value of remittances consistently stand at over 80% (from a low of 82.9% to
a high of 97.4%) when placed against the value of exports over the four year period of 2004 to
2007. As reflected in the gap between exports and imports in both tables the level of
remittancing can easily become a balance of payment issue; a critical concern for a country
that in 2010 had the fourth highest level of debt in the world and where over half the annual
budget goes towards debt financing.
Table 1: Value of Remittances Against Select Indicators (US$ Million) - 2004-2007
Indicator 2004 2005 2006 2007 Remittance 1465.8 1621.2 1769.4 1964.3 Tourist 1437.9 1545.1 1870.1 1905.3 Expenditure Exports 1601.6 1664.3
2133.6
2226.4
FDI 601.6 682.5 882.2 866.5 Imports 4098.6 4866.2
5801.4
6614.8
GDP 10111.4 611.1 663.8 733.2 Source: BOJ (2009)
Table 2: The Value of Remittances as a Percent of Other Select Economic Indicators
(US$ Million) - 2004-2007
Indicator 2004 2005 2006 2007 GDP 14.5 14.6 14.8 15.3 Tourist 101.9 104.9 94.6 103.1 Expenditure Exports 91.5 97.4
82.9
88.2 FDI 243.7 237.5 200.6 226.7 Imports 35.8 33.3 30.5 29.7 Source: BOJ (2009)
Diasporic contribution in the form of remittances is therefore, an essential component of the
Jamaican economy with the implication that any threat to this rising income source will be
deemed a major problem for the country. Such a threat was to come in the form of the global
financial crisis and aggravated by a number of other challenges during 2007-2009, including
the housing crisis.
5
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
4. The Impact of the GFC on Remittancing
The cause of the crisis has been heavily debated and discussed (e.g. Read, 2009). However,
these arguments are not the prerogative of this paper. Rather, the main purpose here is to
examine the impact of the crisis on remittancing and following from this, the implications for
economies with a high dependence on this funding source.
Remittancing is very vulnerable to the economic stability of migrants which is in turn
vulnerable to economic shocks (Alexander, 2010, p.118). With the crisis having a particularly
direct impact on countries such as the UK, Spain, US and other developed industrialized
countries which host the majority of the world’s migrant population, the decline in
employment opportunities in these countries have meant migrants have been among some of
the most affected by the crisis.
As job losses in the major receiving countries brought increased attention to migration
controls, added pressure has also been placed on the existing migrant population who tend to
be the last hired and first fired.11 Furthermore, the variety of opportunities for sustaining
incomes has also diminished. This is particularly the case for two of the countries which host
the majority of the Jamaican diaspora – the US and UK and where immigration policies have
placed increased pressures on migrants (IDB, 2009, p.1). These difficulties have also been
compounded by the oil and food crises.
What has been the impact of the global financial crisis on remittancing? A cursory review of
Figure 1 above would suggest that there has been no change to remittancing with successive
growth being recorded over the eight year period covered in the figure. However, closer and
more focused analysis suggests that this is not the case as there has been a reduction in the
growth of remittances to the island, as shown in Table 3 and Figure 2 below (also Table 4 and
Figure 3 further on).
Table 3: Remittances - Quarterly Growth Rates for Jamaica 2006-2008 (%)
2006 2007 2008 Jan‐Mar 3.6 7.8 11.8 Apr‐Jun 7.6 10.00 11.0 Jul‐Sep 7.4 11.8 4.3 Oct‐Dec 9.9 13.9 ‐2.2 Source: Compiled from BOJ (2009)
6
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Figure 2
Growth Rate in Remittance Inflows for 2008
Dec
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
Mar
Feb
200
180
160
140
120
100
80
60
40
20
0
Jan
Remittance Infow (Millions of U$)
Month
Source: Compiled from BOJ (2009)
For the first time in Jamaica remittancing has declined in terms of its contribution to
household income and this is the case across the rest of the Caribbean and Latin American
region, having contributed 1.7% less in 2008 compared to the 2007 period (IDB 2009, p.1).12
Indeed, though Figure 1 shows an increase in 2008 over 2007, there was a noticeable fall-off
in growth when considered over the past seven or eight years. However, the fall-off was slow,
becoming most obvious in the middle of 2008 (see figure 2).
The decline continued into the 2009 period with inflows declining by US $140 million over
the same period for 2008 (Jamaica Gleaner July 26, 2009). This was an average decline of
15% over the previous year (Maldonado, et al., 2009, p.3). Table 4 which compares growth
between 2008 and 2009 depicts this decline. However, by the end of 2009 remittances had
returned to positive growth though still not to levels witnessed in previous periods.
Comparatively, remittancing has not experienced as drastic a decline as other financial
inflows. Interestingly too, even with the decline, it still accounted for approximately 15% of
Jamaica’s GDP for 2009 marking an increase over the 2008 figure of 14.4% (Meins, 2010).
This is partly due to the poor performance of other areas of the Jamaican economy.
Nonetheless, the 2009 figure represents the first annual negative growth on record (see Figure
3 below).
7
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Month Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Table 4: Change in Remittances Inflows 2008-2009 (US$ Millions)
2008 2009 % change 149.6 134.6 ‐10 162.3 132.3
‐18.5 174.3 145.9 ‐16.3 177.4 141.7 ‐20.1 180.5 145.6
‐19.3 171.2 153.8 ‐10.2 177.0 153.9
‐13.1 165.9 152.1 ‐8.3 184.3 152.4 ‐17.3 166.0 155.9 ‐6.1 135.7 142.7
5.2 177.0 180.9 2.2 Source: Compiled from Bank of Jamaica (2010, p.8)
Source: Compiled from Minto (2009) and BOJ (2009)
The impact on the Jamaican economy has also been direct, particularly given that remittances
represent a significant source of foreign exchange. The reduction has thus placed added
burden on the country’s ability to trade and secure important resources. As demonstrated
earlier in Tables 1 and 2, overall remittance income constitutes a vital segment of total foreign
exchange receipts (e.g. when placed alongside that from export earnings). Thus, the country
experienced a shortfall of US$12.7 billion in foreign exchange earnings during January-May
2009 (Jamaica Gleaner 26, July 2009). While other fall-outs such as the retreat of a number of
bauxite companies from the island had some bearing here, the decline can also be attributed to
the fall-off in remittance receipts from the US & UK (Table 5) which together account for
76% to 85% of total receipts. Interestingly, there was an actual increase in remittancing from
8
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Canada and the Cayman Islands. In the case of Canada, this can be explained by the fact that
Canada was not affected by the crisis to the extent seen in the other host countries. Thus,
supporting the claim that remittancing is vulnerable to the economic fortunes of the host
country.
Table 5: Remittance by Source Country (US$MN)
2003 2004 2005 2006 2007 2008 2009 US 761.6 820.8 924.1 994.4 1050.5 1092.9 977.2 UK 317.4 404.6 356.7 417.6 500.0 507.2 380.1 Canada 63.5 86.5 105.4
111.5
136.2
158.9 179.8
Cayman 63.5 102.6 154.0 155.7 152.2 144.1 97.3 Other 63.5 51.3 81.1
90.2
125.3
118.6 157.5
Total 1269.5 1465.8 1621.2 1769.4 1964.3 2021.6 1791.9 Source: Bank of Jamaica (2010, p.13)
Even as remittances returned to positive growth at the end of 2009 this is still likely to be slow
given the remaining uncertainty in the job markets in developed countries (see e.g.
Maldonado, Bajuk and Watson, 2009). The fall-out has also helped to underscore the already
obvious structural weakness of the Jamaican economy which is unable to overcome its growth
challenges and provide opportunities for its citizens. The government has responded to the
crisis by turning to the IMF, which has in turn requested that the island adopt a number of
austerity measures in order to address some of the longstanding issues relating to public sector
spending, tax reform and debt restructuring.
5. Revelations from the Crisis: Implications for Remittancing and Development The Crisis has revealed a number of important points related to diasporas and remittancing,
and the growing dependence on this source of funds among governments in developing
countries, including Jamaica. This section considers some these issues which summarily,
relate to the resilience of remittancing, the risks in aligning the national future too closely to
the fortunes of the diaspora, the need to continue the search for ways of advancing
productivity and economic efficiency, and for diversification, both in the economy, as well as,
in the use of remittance funds.
An obvious and major point that has emerged is that in the face of the many crises and
economic difficulties, the diaspora has continued to remit. Sustained remittancing in spite of
the GFC emphasises the resilience of the diaspora and remittancing. Continued remittancing
also marks the level of importance of such funds to household subsistence, with these funds
forming a significant mainstay of household incomes in Jamaica (see e.g. Dade, 2006, p.7).
That is, remittances often go towards household subsistence, education, health, etc. Already
the reduction in remittances suggests some reduction in the ability of these families to procure
goods and services to the extent accustomed.
9
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
A closer look at the demographics of recipients and senders gives further insight into the
diaspora’s efforts to maintain remittancing despite the GFC. In Jamaica the educated and
middle-class family members who migrate tend to remit less frequently than those who are
less educated and originate from poorer communities. As such, recipients and senders tend to
be poorer families, a similar situation for other countries. Therefore, where remittances are
reduced the social and welfare costs to Jamaica and other receiving countries can be high with
the possibility of such a decline fuelling attraction to crime and criminal activities. Where the
main beneficiaries of remittancing are already the poorer groups the risk is that reductions
witnessed may place even more burdens on these families, forcing them further into poverty.
The level of dependence at the household level explains the sustained effort to maintain
funding even as times get harder in the host country. Thus, dependence among households
means that the diaspora will continue to remit funds even if at reduced levels, arguably making
remittancing more sustainable vis-à-vis other funding sources.
Secondly, migrants tend to adopt creative strategies to cope in order to maintain and increase
their contribution to families at home. Thus, in spite of an initial decline, remittancing picked
up toward the end of 2009, again an interesting point given that job losses remained an issue in
the US and UK. As noted earlier, these are the two countries from which the island
consistently receives the majority of its remittances. Thus, according to an IDB report, the
diaspora in Latin America and the Caribbean have sought to cope with the crisis by first
cutting personal expenses (e.g. travel and telecommunications) and taking on additional jobs
with reductions in remittancing being considered a last resort (Meins, 2009, p.5). Indeed, this
may help to explain the fact that even as the diaspora has been faced by a number of crises
since 2007, it is only towards the latter half of 2008 that remittancing experienced its first
serious downturn.
A third and related point is that impact is not simply ‘economic’ but transcends this realm to
other areas of life. While the crisis was clearly economic, there has also been a social impact,
particularly, given the interdependence between these two spheres. Indeed, as pointed out by
Alexander (2010, p.118) the GFC has affected this important income source for the world’s
poorest, making the crisis not only an economic but social issue, as well. As such, the decline
in remittancing has added to the pressures on the state to provide opportunities and welfare
services for its citizens. Further, where recipients are unable to consume local goods and
services procured through remittance funds then local businesses (especially, small
businesses) also suffer.
Fourthly, the crisis suggests that there is some risk in basing development and growth on
remittances and in essence, aligning the future of the country so closely to the fortunes of its
diaspora. More generally, it suggests the dangers to developing (and developed) economies of
too much dependence on any single source of national income. This is even in spite of the
resilience argument offered above. As demonstrated from the crisis, remittance funding is very
much tied into the success of the economies of the large developed host countries. Therefore,
even where there has been some level of resilience as suggested in the slow fall-off and
ultimately, the return to growth, it is still the case that the reduction has been in those countries
most affected by the crisis. For this reason remittance levels are largely related to the fortunes
10
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
and woes of these economies. As the crisis eases, there is still some concern as to the extent to
which the diaspora is willing or able to maintain remittance levels in the face of a sustained
economic crisis. Therefore, where the Jamaican government plans its budget and development
agenda based on projected remittancing and the receipt of foreign exchange, the country may
find itself experiencing serious shortfalls where expectations are not realized.
The fifth major lesson is related to the last point made above. That is, that the GFC has
underlined the importance of having more diverse sources of funding and economic
diversification beyond Jamaica’s dependence on remittancing and tourism, areas that are both
susceptible to external economic shocks. Importantly, remittancing cannot erase the need for
Jamaica and other countries to find ways of sustainably growing their economies. These would
include efforts at increasing productivity, efficiency and fiscal discipline. The departure of
citizens thus marks the continued failure of such governments to provide opportunities where
skills and talents can be utilized at home.
At another level, the crisis also points to the need to diversify the ways in which remittance
funds are being utilized. This may mean scaling up impact beyond household subsistence to
help fund more entrepreneurial ventures or diversifying the ways in which they are used at the
household level. Ultimately, this involves the creation of sustainable ventures with remittance
funds providing the seed capital for viable business initiatives. As yet, the financial services
market for remittance funds remains untapped in Jamaica and many other countries with many
recipients lacking access to bank accounts; a condition which is similar for the rest of the
Caribbean and Latin American Region (Meins, 2009, p.8).13
These points, therefore, resound beyond the shores of Jamaica and other countries given the
share of remittancing in developing economies across the globe. As noted by Alexander
(2010, p.118), around 80% of remittances come from high income countries, making the
concern over the impact of remittances, not just a Jamaican issue but a global one. The
increasing attention to this source of income as a form of development assistance, in the face
of declining ODA and economic competitiveness (as seen in the Jamaican case) also exists as
a concern for international development institutions and developed country donors.
6. Beyond Remittancing?
Finally, the GFC suggests the need for Jamaica and other recipient countries to consider
diasporic ‘contribution’ through a more eclectic lens. That is, one which allows for attention
beyond the sustained focus on remittancing to the other ways in which the diaspora can help to
advance national goals and objectives. Key to this renewed emphasis is, as mentioned above,
an expansion in the use of remittancing to lift families and communities out of poverty and
into more sustainable livelihoods. For instance, Orozco and Welle have investigated the role
of Hometown Associations (HTAs) in Latin America and the Caribbean, where remittances
are pooled and ustilised for improvements in sectors, such as health and education in the
communities from which the diaspora or migrants originated (2006).14
11
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Included here would be opportunities for purchasing insurance, mortgages, and microcredit.
There are some encouraging signs in this regard from both the government and business
community. For instance, already financial institutions in Jamaica (e.g. Jamaica National
Building Society) have branched out to open offices in those countries and cities populated by
the diaspora. These have begun offering opportunities for the diaspora to make investments
and purchase residential properties in Jamaica and secure funding from locally based
institutions, etc. Such efforts have been accentuated by policy initiatives undertaken by
national public investment bodies such as Jamaica Trade and Invest and various ministries and
departments that have sought to inform the diaspora of the variety of ways in which they can
contribute more directly to national growth and development. The biennial Jamaica Diaspora
Conference remains one way in which the government is seeking to achieve this. The
economy has also benefitted from the revenues brought in through these events, particularly,
the travel and tourism industry.
However, going beyond remittancing also requires more emphasis on the skills, talents,
networks and other non-monetary resources possessed by diasporas in ways that compliment
and advance the impact of remittances. Again, this is not to deny the relevance of remittance
funds at the household level and for the nation’s present or future survival. This would mean
accessing the diaspora’s talents at home, even as they continue to reside abroad, as a key step
in converting brain drain into brain gain. This is important in a country where as an estimated
45.2% of total migrants to the US from Jamaica actually had tertiary level education (Minto,
2009, p.12). Already, cases such as Ireland, India, China and Taiwan have been noted for the
contribution of their diaspora networks and investments in development (e.g. Chang, 1992;
Bielenberg, 2000; Fanning, 2000; Saxenian, 2001; Burnham, 2003; Commander, etc. 2003;
Minto, 2009). In Jamaica, the diaspora’s involvement can therefore, be heightened in a similar
way and in others, including building and construction, education, finance, research and
consultancy and ICT. There also remains a role for the diaspora in helping to maintain
accountability and good governance at home. These can for instance, be achieved through
policy transfer and the exchange of best practices, as informed by the countries in which they
reside.
Going beyond remittancing also means considering the role of the diaspora in a new kind of
diplomacy, particularly in moving toward the use of private diplomacy to shore-up the waning
public diplomacy. This remains one tool or resource that is at the disposal of small states in
global politics. This involves the use of the diaspora more actively in international relations as
a lobbying and marketing force, thus helping to raise the profile of the home country in
international affairs. The diaspora exists as a free source of influence with ties and contacts in
the host country. These are also citizens with the right to vote or are elected officials who may
be able to inform host country policy towards developing nations. Of course, this influence
can be used for or against the home country and there remains some concern around the extent
to which diaspora groups can (or are willing) to organize and become a lobbying force (see
Minto-Coy, forthcoming and Minto, 2009 for a wider discussion). As effective boundarycrossers, the diaspora already knows the home country and may also be active at the
community level both in the home and host lands. As such, diasporas offer the means through
which governments can potentially access spheres of influence in the developed world.
12
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
It has been documented that the main destination countries for the Jamaican diaspora (and for
many other English-speaking nations in the Caribbean) are those countries that have had some
influence over policy choices in these states (e.g. Mintz, 1989; Newstead, 2005). However,
Jamaica and the Caribbean are now facing a ‘crisis of influence’ which emerged with the end
of the cold war and has increased as the U.S. has shifted emphasis and resources to its war on
terror. This waning influence and relevance beyond that of a tourism centre has also emerged
as the UK has shifted attention from the Caribbean. Further, the enlargement of the EU to
include nation-states that have had no historical ties to Jamaica and the rest of the
Commonwealth has seen old alliances and protections dissipate.15
As such, Jamaica and other remittance dependent states in the Caribbean and beyond must
begin to explore more proactively a new brand of diplomacy. One which involves the
mobilization and use of its large diaspora and other non-state actors as a marketing and
lobbying force for governments and citizens in the developed (and developing) host lands.
Such collaboration could be useful in informing developed country governments of conditions
in the homeland. and particularly, in helping to inform decision makers of the effects of
developed country policies on the island and the best way and form in which development
assistance can be offered. Thus, even as Canada began negotiations for a renewed trade
agreement with CARICOM16 - of which Jamaica is a member - there remains a place for the
diaspora in the successful conclusion of such negotiations. This is namely, in helping to lobby
Canadians and their Government in arriving at sustainable terms for the Caribbean. Beyond
this, there may potentially be some scope for considering the role of the diaspora and
remittancing in meeting both home and host country obligations under such multilateral
arrangements.
The benefit of such lobbying has already been evidenced in the UK, where diaspora groups
(including Jamaicans) have been successful in lobbying the UK government to extend pension
coverage to those who wish to return to Jamaica and Barbados. Even more recently, lobbying
by the Diaspora and other interested parties (e.g. regional governments and travel agencies)
also saw the UK government rethinking a decision to tax all travel to the Caribbean, a move
which would have added pressure to an already weakening Jamaican (and Caribbean) tourism
market. Suggested here is the value of private diplomacy which can be heightened for
increased impact when combined with public diplomacy, as well as, the importance of
different diaspora partnering for greater impact. Voice and leverage can, therefore, be secured
where small and developing countries are able to partner with the diaspora in lobbying
governments, non-governmental organizations and business leaders in the host and home
countries.
7. Conclusion
Summarily, this chapter has sought to investigate the impact of the GFC on remittancing and
to investigate the implications for the increasing dependence on this source of development
funds. It has shown that in spite of the declines experienced since 2008 the picture is not one
of total gloom. That is, while there have been worrying declines, the fact that remittancing
remains a sustained source of income for Jamaica and many other developing countries,
13
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
suggests the resilience of this source of income, certainly when compared to other
contributors, such as tourism and FDIs. The chapter argues that this has been due to the
dedication and sacrifice of a diaspora fully aware of the level of dependence on these funds.
Remittancing, therefore, constitutes one way in which developing countries have attempted to
find innovative ways of building resilience in the face of the vulnerabilities faced in a
competitive and volatile global environment.
Nonetheless, there remain a number of concerns as it relates to the relationship and
dependence on remittancing in the developing world. To this end, the chapter argued for more
attention to the boundary-crossing function of the diaspora and going beyond remittancing to
utilizing diaspora resources in international relations and in the economy and governance of
the home country. It also argued for sustained search for ways to diversify economies beyond
too high a dependence on any one source of income, as well as, the ways in which remittance
funding has been utilized.
This discussion has taken place using the case of Jamaica as an example. However, as
indicated throughout the chapter, these findings have far wider implications. This is
particularly in light of the value of remittancing to economies around the world. Dependence
on remittancing is therefore, set to continue but with greater innovation and creative lessondrawing, efforts can be made to increase the relevance and long-term impact of such funds.
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Endnotes
1. See e.g. Palmer (1990), Mountford (1997), Thomas-Hope (1998), Fanning (2000), Bhorat,
Meyer and Mlatsheni (2002), Docquier and Rapoport (2004), Lowell, Lindsay and Gerova
(2004), Rosenzweig (2005), Thouez (2005), Ghosh (2006), Ionescu (2006), Page and Plaza
(2006), Fajnzylber and López (2008), Minto (2009 and forthcoming).
2. In this paper the terms ‘home’ or source country will refer to the country of origin or birth
for the diaspora. Host or receiving country will in turn refer to the adopted country, which in
most cases tend to be the larger more developed country.
3. Remittancing is used here to refer to the practice by diasporas and migrants of transferring
money from the host to home country.
4. See note 2.
5. See WB (2008).
6. Though, of course, variances may exist in areas such as the specific value of national GDP
currently accounted for by remittances or the size of the diaspora vis-à-vis the local
population.
7. For instance, Docquier and Marfouk estimate that the population moved from 154 to 175
million 1990-2000 (in López-Córdova and Olmeda, 2006). The latest estimates from the
International
Organisation
for
Migration
is
214
million.
See
http://www.iom.int/jahia/Jahia/about-migration/facts-and-figures/lang/en (Last accessed:
March 17, 2010).
8. See note 1.
9. The main push factor for emigration has been economic with others such as security being
other rationales.
17
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
10. For instance, remittancing represented over 4,000% of ODA for 2005 (Minto, 2009, p.13).
11. Unemployment in the US in January 2009 stood at 8.1% with the housing market shedding
all jobs gained during the housing boom of 2003-2006, an area that employed many
immigrants (IDB, 2009, p.7).
12. Other factors, including the declining value of the US dollar may also play some role in
this decline.
13. This is around 30-50% (Meins, 2009, p.8).
14. The authors also sound some warnings and concerns around this issue. See Orozco and
Walle (2006) for further details.
15. For example, loss of preferential trade access in markets such as Bananas and sugar.
16. CARICOM or the Caribbean Community is the regional group of the English-speaking
Caribbean (along with Cuba and Haiti).
18
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Tea KBILTSETSKHLASHVILI
Faculty of Business Management
International Black Sea University, Georgia
[email protected]
[email protected]
THE IMPACT OF THE GLOBAL FINANCIAL CRISIS ON GEORGIA’S
INVESTMENT: THREAT OF SLOWING DOWN INVESTMENT
FLOWS AFTER OSSETIA – GEORGIAN WAR
Abstract
The paper examines the transformation process of investment climate of the country during
the transition period - “Rose Revolution” - to a democratic one. As a post-Soviet country,
Georgia is undergoing significant economic, political, and social changes with remarkable
impacts on all aspects of the life. Investment flows has significantly decreased after Georgia –
Ossetian war thus causing poverty, unemployment and insecurity that become serious
problems for the majority of Georgia’s population. One of the major determinations of
country’s economic developments and well-being are the indicators of investment structure
and volume. These indicators show attractiveness of economy for foreign investors and give
clues for analyzing countries development process. The article focuses on effectiveness of
Investment climate in Georgia after transition period and analysis results faced after global
crisis on Georgia’s investment. A good investment climate is an essential pillar of a country‘s
strategy to stimulate economic growth, which in turn generates opportunities for poor people
to have more productive jobs and higher income. Hypothesizing that long – term effect of
foreign investment will result in increased employment and household income, poverty will be
decreased and Georgian economy will be developed. Attracting Foreign Direct Investment
(FDI) to Georgia after Rose Revolution and slowing it down after Ossetia – Georgian war in
Georgia – a country with low national savings but rich natural resources and insufficient
capabilities of establishing new capacities for boosting economic prosperity – is an issue of
major importance nowadays. Article also explains and deals with the real market situation, the
economic hardships, its disadvantages and discusses reasons for decreased investment process
and gives recommendations how to attract foreign investors and in which particular fields to
invest money.
Keywords: Foreign direct investment, Global crisis, Economic growth.
19
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
1. Introduction
Georgia is a developing country facing various problems in different areas, so foreign direct
investment (FDI) inflow provides the opportunity and incentive for firms to invest
productively, create jobs, expand and have a positive influence on the country’s economy. The
Black Sea is a region of vital interest to the foreign investor because Georgia is a country that
has many opportunities (natural resources and agribusiness sectors, infrastructure
development, telecommunications and energy) for attracting FDI. The Rose Revolution
(November, 2003), which was not only a political revolution but also an economic one,
opened a new chapter in the history of modern Georgia. Before 2003, Georgia’s economic
development suffered from a reputation for instability, violence, corruption, and unreliable
supplies of energy, wealth of population was very low. The picture has significantly changed
for the better. Since 2004, the Georgian government has undertaken institutional reforms
including the restructuring and downsizing of government ministries, privatizing large stateowned entities, increasing the pay of public servants and prosecuting corruption, reducing the
number and rates of taxes and improving tax and fiscal administration, streamlining licensing
requirements, deregulating, simplifying customs and border formalities, and undertaking many
other efforts to make it easier to do business in Georgia (U.S. Department of State, 2009). Due
to these economic and financial reforms (including tax, customs, financial licensing and
privatization) gained Georgia international interest as an attractive place to do business. The
post-revolution government achieved a number of successes in areas such as dramatically
increasing state budget revenues, fighting corruption, and setting up effective cooperative
relationships with the international financial institutions but it made some mistakes, too, in
building a democratic state in general and in its economic policy in particular. Its relationship
with Russia and its excessive exposure to Russian investments is particularly troubling. The
country’s policies need to be fine-tuned in order to protect its democracy and promote further
economic growth (Papava, 2006). Investment climate is the institutional, policy and regulatory
environment in which firms operate – factors that influence the link from sowing to reaping
and I can say that investment climate itself is the process from sowing to reaping because you
will reap what you have sown.
One of the major determinants of a country’s economic development and wellbeing are the
indicators of investment structure and volume. One of the key factors in farther economic
expansion of Georgia is the development of competitive economy with strong service sectors.
This cannot be achieved without FDI. These indicators show attractiveness of economy for
foreign investors and give clues for analyzing countries development process but low level of
innovation, poor competitiveness; high levels of unemployment and emigration of qualified
workforce are severe problems that our country is facing.
An attractive investment climate, including political stability, is necessary but not the only
condition for motivating investors which are influenced by two factors: the availability of
resources and the market. In terms of resource, Georgia is famous for its relatively cheap
labour force (World Bank Group, 2009).
20
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
The aim of my research is to increase understanding of investment to enhance its benefits for
Georgia to improve investment policy to attract and improve the Climate for Business and
Investment and encourage investment resources for foreign and domestic investment for
creating attractive environment for foreign and national investors in the region.
- To find out in what way investment can be increased in rapidly growing, developing,
and economic countries, like Georgia and what tendencies of that are recognized in
Georgia.
- To analyze FDI structure and impact on social welfare and economic growth.
- To identify major problem areas for investors.
- To elaborate suggestions on recommendations for Investment Policy Framework (IPF)
improvements in order to increase country competitiveness for investment resources etc.
According to the Ministry of Economic Development of Georgia, specific advantages and
interests in Georgia in 2009 are:
9 Natural Resources
9 Agriculture
9 Industry
9 Infrastructure
9 Energy
9 Tourism
9 Telecommunications
9 Transport and Logistics.
Since 2000 it was difficult and practically imposible to attract investors and funds to Georgia,
due to the high political risk, local conflicts and instability, weak economy but after this
period, inflow of investment started; it is easy to explain what are attractions of Georgia and
caucasus region, first of all, suitable geograpical location, concentration of natural and energy
resources, cheap and more or less educated workforce, since the soviet union; also tradition of
production and manufacturing, all these were main factors attracted investors to Georgia; if we
begin from the mid 90s, and look through the investment characters, main investments were
mostly related to FDI to Azerbaijan’s energy sector and the construction of an oil-gas
pipelines linking the caspian sea with the Georgian black sea ports, so investments to Georgia
mostly were caused due to its location as a transit country for energy transportation; later at
the beginning 21st century energy projects continued, so as we see the main investment comes
to pipelines and infrustructural project developments.
According to United Nations Conference on Trade and Development (UNCTAD) Foreign
Direct Investment has the potential to generate employment, raise productivity, transfer skills
and technology, enhance exports and contribute to long term economic development of the
world’s developing countries. More than ever, countries at all levels of development seek
leverage FDI for development. FDI is the largest source of external finance for developing
countries. To improve increase understanding investment related issues and enhance its
benefits for developing countries it is necessary to analyse FDI trends and their impact on
development, to improve investment policy and strengthen institutions that deal with FDI.
21
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Investments always were and will be the motive lever of economic development of any
country. In spite of the World Crisis, Georgia still remains in the centre of international
geopolitical interests and as an attractive country for investments. In Georgia, as a result of the
recent events, actually there are not enough domestic investing resources to update the oldfashioned fixed capital. Unfortunately, even today existing macroeconomic environment does
not support to develop private sector. The Domestic market is overloaded with foreign, cheap,
of low-quality and unhealthy products. It is practically impossible to sell the national output.
According to the modern demands, introducing of new techniques and technology, gaining
modern professional knowledge and providing more specialised human resources, opening
new industrial enterprises by means of investment is becoming a key issue. Reconstruction of
enterprises is inconceivable without foreign subsidiary resources. Without all of these factors
it is unimaginable to produce national compatible product, also total social-economic
development of the country is impossible. Investment is gaining step by step a deep economic
meaning with both practical and theoretical point of view.
Investments always were and will be the motive lever of economic development of any
country. In spite of the World Crisis, Georgia still remains in the centre of international
geopolitical interests and as an attractive country for investments. In Georgia, as a result of
the recent events, actually there are not enough domestic investing resources to update the oldfashioned fixed capital. Unfortunately, even today existing macroeconomic environment does
not support to develop private sector. The Domestic market is overloaded with foreign, cheap,
of low-quality and unhealthy products. It is practically impossible to sell the national output.
According to the modern demands, introducing of new techniques and technology, gaining
modern professional knowledge and providing more specialised human resources, opening
new industrial enterprises by means of investment is becoming a key issue. Reconstruction of
enterprises is inconceivable without foreign subsidiary resources. Without all of these factors
it is unimaginable to produce national compatible product, also total social-economic
development of the country is impossible. Investment is gaining step by step a deep economic
meaning with both practical and theoretical point of view.
The FDI inflow can also create many other benefits for recipient economies. For example, FDI
can help generate domestic investment in matching funds, increase local market competition,
create modern job opportunities, increase global market access for locally produced export
commodities, facilitate transfer of managerial skills and technological knowledge from
developed countries, etc. - all of which should ultimately contribute to economic growth in
host countries. Finally, foreign direct investment has the potential to generate employment,
raise productivity, transfer skills and technology, enhance exports and contribute to the longterm economic development of the world’s developing countries. More than ever, countries at
all levels of development seek to leverage FDI for development.
Despite the improvement of the investment climate in Georgia, after 2003, there still remain a
number of persistent problems about defending property, financial transparency, stability, and
outdated material – technical base, underdeveloped infrastructure and so on. The restructuring
of industrial enterprises is being carried out weakly. It has completely neglected the openness
22
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
of government purchases and the need to do this in competitive circumstances and etc. By
considering these factors, in respect of effectiveness, FDI still do not have enough and
corresponding impact on employment and social existence or well – being of society. That is
quite serious thing, but all these are not caused due to the current political instability and war
situation, because Georgia has these kinds of problems already for a long time. Much attention
should be paid to these issues and they must by solved finally. In other case, it will be
impossible to achieve improvement, increasing tendency and development of national
economy, also to maintain the current tendency. In this situation: decreased number of
investments in Georgia, acute deficit of international investment resources (which is created in
the world after crises), poor FDI resources and mobilization problems (mistrust) raise a
question for investment policies’ next improvement and creating solid guarantees for the
protection of investors.
Over the past three years 2005-09 the Georgian economy has been developing in a dynamic
way with the real GDP annual growth rate exceeding 10 percent on average. The 2008 target
was set at 9 percent. Georgia’s economic growth was mainly driven by intensive private
capital inflows (FDI, bank loans and portfolio investments) and increasing government
spending. According to the official data, which is also confirmed by the IMF, these inflows
increased by 4.6 times in 2004-07 and reached USD 2.3 billion (22.5 percent of GDP). The
consolidated budget expenditure over the same period grew by 2.5 times and exceeded GEL 6
billion (35.8 percent of GDP). The invasion of Russian troops into Georgia in August 2008,
however, changed the country’s economic situation in essence.
We can list down key factors which attract foreign investors in Georgia:
Table 1. Key factors in Attracting Investment (FDI)
Factor
What helps
investment
Political stability A stable business
climate
Home country measures
International
Investment agreements
factors
Economic
fundamentals
Regulatory and
administrative
Investment
promotion
Implications for policy
Reduce conflict and corruption and impose
rule of law and accountability.
Not under control of host country BITs and
investment
provisions
in
integration
agreements at least contribute to a more
predictable investment climate.
Market
size
and Macro policies conducive to growth and
Growth. Infrastructure competitiveness. Provide appropriate and good
and skills.
quality infrastructure and skills.
Business friendly
Cut red tape, e.g. facilitate trade by
regulation
streamlining customs.
Clustering
Consensus view is that specific policies are not
EPZs
as important as general investment policies, but
when implemented and targeted well they can
be useful. Employ an industrial policy which
includes technology and skills.
23
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Investment
incentives
Fiscal and financial
incentives
Implementation
issues
Clear and predictable
rules are important
Target incentives well so that they fit in an
overall development strategy.
Offer a stable and a competitive corporate tax
rate (but not zero).
Target incentives to (new) investment in
capital equipment.
Implement policies consistently. Create
sufficient capacity at an adequate government
level to execute projects (Morrissey, O., 2006,
p. 17).
Source: Dee and Gali, 2003
According to Table 1. Key factors in attracting FDI are: political stability, economic
fundamentals, regulations, investment promotion and incentives and etc. The problems most
developing countries face in respect of FDI are that the level is generally very low and
typically highly concentrated in particular countries and/or sectors, with low levels of
technology transfer and low linkages or spillovers for the rest of the economy. We can say the
same about Georgia where regional integration and regulatory reforms associated with EPAs
provide an opportunity for ACP countries to attract higher levels of more diversified FDI:
larger markets, lower transactions costs associated with trade and investment, and generally a
more favorable business environment. Furthermore, as EPAs will impose adjustment costs that
require new resources for gaining sectors and/or to provide employment for released labor
increased foreign investment will be needed (Milner et al., 2007).
As to about Policy for investment we can consider using the following recommendations:
There are most commonly used inducements of fiscal incentives to attract foreign investors in
the country, specifically:
• Reduced direct corporate taxation – General measures aimed at easing the corporate tax
burden are used to attract foreign investors. These include reduced rates of corporate income
tax, tax holidays and special tax-privileged zones.
• Incentives for capital formation - These are policies for tying lower taxation to
corporate investment to encourage foreign enterprises to invest. Examples include investment
allowances (deductions from taxable income based on some percentage of new investment)
and investment tax credits or deductions against profits that are reinvested in the host country,
and
• Reduced impediments to cross-border operation - Companies are attracted to locations
where the fiscal system imposes minimal costs on the cross-border transfer of funds, goods
and services and manpower. Some of the incentives offered are Withholding Tax, lower
taxation of foreign trade (e.g. tariff exemptions) or of employees (Morrissey, 2006, p. 12).
In reviewing the Georgian economy, macroeconomic indicators are of great importance. To
have a look to their change according years in quite interesting picture.
24
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Table 2. Main Economic Indicators (2005 - 2009)
2005
2006
2007
2008
9.6
9.4
12.4
2.1
Real GDP Growth (%)
3355.4
4670.4
6456.9
7555.8
Foreign Trade
Turnover (ml. USD)
865.5
992.6
1240.2
1497.7
Export (ml. USD)
2490.0
3677.8
5216.7
6058.1
Import (ml. USD)
34
14
32.5
21.5
Exports (growth, %)
Imports (growth, %)
34.8
47.8
41.8
16.2
Inflation Rate (%)
Foreign Direct
Investments (ml. USD)
GDP (ml. USD)
GDP per capita (USD)
6.2
449.8
8.8
1 190
11.0
2 014.8
5.5
1 564
6.145
1 479
7.849
1 779
10 175
2 315
12 797
2 920
2009
9
2507.6
515.1
1992.5
- 35.3
reduce
- 37.7
reduce
6.4
124.7
2 301
Source: Ministry of foreign affairs of Georgia
The GDP growth rate in 2008 was 2.1 per cent (preliminary data). GDP in market prices
amounted to 19 070 ml. GEL (12 797 ml. USD) and GDP per capita equaled to GEL 4 352 (2
920 USD) while by 2009 preliminary data GDP in market prices amounted to 3 846 ml GEL
(2 301 ml. USD) and GDP per capita equaled to GEL 877 (525 USD). USD and foreign trade
turnover amounted to 2507.6 ml. USD in 2009 (37.2% reduce in comparison with the last
year. In 2008 the foreign trade turnover amounted to 7555.8 ml. USD (17.2% increase in
comparison with the last year), where the export was 1497.7 ml. USD (21.5% increase) and
import - 6058.1 ml. USD (16.2% increase). The negative trade balance of Georgia was equal
to 4560.4 ml. USD. The ratio of import coverage by export was 24.7 %.), where the export
was 515.1 ml. USD (35.3% reduce) and import - 1992.5 ml. USD (37.7 reduce). The negative
trade balance of Georgia was equal to 1477.4 ml. USD (38.5% reduce). The ratio of import
coverage by export was 25.8 %.
Real GDP growth rate has been forecast at 1% for 2009, down from an initial forecast of
2.5%. Net FDI forecast for 2009 was at US$1.1 bl., 8.4% of ‘09 GDP. Inflation has been
declining since November 2008 (In 2008 the inflation rate was 5.5% (In 2007 the inflation rate
in Georgia was 11.0%; in 2006 - 8, 8%, in 2005 - 6,2% and in 2004 - 7,5%) ‐ annual
period‐average consumer price index (CPI) in March 2009 fell to 7.8% from 9% in February
2009 and 2.3 as the end of 2009, whereas the annual end‐of‐period CPI decreased to 1.6%
from 2.1%. Net FDI forecast for 2009 was at US$1.1 bn, 8.4% of ‘09 GDP. Regardless of
significant drop in exports and imports of goods and services, Georgian trade structure
continues being diversified. Georgian trade structure continues being highly diversified
(Georgian Economic Overview, 2009).
25
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Figure 1. Net FDI Inflows (US $ ml.)
2500
2000
1500
2015
1564
1000
1100
1076
500
331
483
542
2003
2004
2005
0
1
2006
2007
2008
2009
Source: Department of Statistics of Georgia
The amount of foreign direct investment in Georgia is changing according years: FDI inflows
were too small in 2003, just 8.3% compare previous years, it made 331 ml USD in 2003,
increased till 483 million USD in 2004, which is 9.4% more, 542 USD, which is 8.5% more in
2005, than 13.9% increase in 2006 and the largest investment in the Georgian economy and
highest FDI inflow was in 2007 – 2015 USD, 19.8% more than in previous years. After this
period investment decreased by 10.1% in 2008 and by 8.4% in 2009. Despite the decrease, the
situation is better than the previous years.
The average monthly salaries and wages of hired employees grew in absolute terms across the
economy in 2009 in line with the established trend. This time, the annual growth comprised as
much as 56 percent. The monthly earnings of hired workers grew by 9.3 percent in 2009
compared to 2008.
The public sector salaries grew by 75.7 percent whilst those of the private sector grew by 42.9
percent in the first two quarters of 2008. Before 2005, it was the private sector salaries which
grew more rapidly than those in the public sector. The trend was reversed in 2008 and 2009
with the growth of public sector salaries catching up with that of the private sector. In 2009, it
was not only the growth rate of the private sector salaries that were much higher than that of
the public sector but the salaries themselves appeared substantially higher than those in the
private sector. If the earnings of the private sector hired employees were 16.1 percent higher
as compared to those of the public sector in 2008, the salaries in the public sector were 5.9
percent higher than those in the private sector in 2008. In quarterly terms, the salaries in the
public sector grew by 7.4 percent and by 11 percent in the private sector in Q2, 2008 as
compared to the previous quarter. Whilst the salaries and wages in the private firms are
regulated by the market and by definition are to reflect the inflation, those in the public sector
are subject to budgetary decisions. The share of salaries and wages in the monthly household
26
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
monetary income, which is usually the largest source of household income, was 35.5 percent
and diminished as compared to the corresponding period of the previous year. It was smaller
in the second quarter of the year than it was in the first. Remittances were the second largest
income source with its share growing to 15.6 percent in total over the year. It failed, however,
to retain its position in the second quarter of the year and moved down to the fourth position
on the list of income sources with a substantial reduction from being very high in the first
quarter. Debt or the use of savings and the sale of property came in the third position although
the figures did reduce to 12.9 percent. In quarterly terms, it appeared second in importance and
grew dramatically in the second quarter after having fallen to the fifth position and being
reduced as a share in total household income in the first quarter.
Despite our previous achievements there are still serious problems till today about receiving a
credit and instillation of business. According our research instillation of business was difficult,
what was prolonging the existence of business, expenses and regulations of taxes. There are
numerous aspects to take into account when analyzing the investment climate in Georgia. The
World Bank called Georgia “the world’s fastest growing economy” in 2007 and the 2008
report assigns Georgia the 18th place in the list of the countries where doing business is the
easiest. The World Bank recognized Georgia as the world’s fastest reforming economy in its
2009 “Doing Business” report. Georgia ranks 15th out of 181 countries of the world according
to the ease of doing business in the “Doing Business 2009” report released by the World Bank.
Georgia ranks higher than such countries as Belgium, Estonia, Germany, Austria, Latvia,
France, Azerbaijan, Armenia, Turkey and others. In the new report Georgia improved its score
in the following components of the index: starting a business, dealing with construction
permits, registering property, getting credit, closing a business. Singapore ranks first and
Congo
is
at
the
bottom
of
the
“Doing
Business
2009”
rankings
(http://www.investingeorgia.org/news/view/1438).
The greatest importance, when talking about FDI inflows in Georgia, pertains to the existing
investment climate, which is the major determinant of the amount of FDI that flows into the
country yearly and impact of FDI on well being of population.
If we will compare data’s for 2008 and 2009, we can see that external trade has increased for
all countries but
- Export turnover decreased from 795 544, 0 in 2008 till 515 104, 8 in 2009.
- Import turnover decreased from 3 196 654, 6 in 2008 till 1 992 525, 8 in 2009.
For a country to effectively compete in international markets and realize its comparative
advantage, a number of basic macroeconomic and microeconomic conditions need to be in
place.
™ First, it requires a stable macroeconomic framework and a competitive exchange rate.
™ Second, it should have a liberal trade regime and enjoy reasonably easy access to
export markets.
™ Third, it should have a favourable investment climate, including supporting trade
services and institutions.
™ Fourth, it should have efficient mechanisms for technology transfer and "learning" at
the firm level.
27
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Table 3. Major Trade Partners of Georgia by Turnover in 2009
Export
Import
External trade
Countries
1000 USD
%
1000 USD
%
1000 USD
%
Turkey
120 220,1
23,3
377 232,7
18.9
497 452,8
19,8
Azerbaijan
76 982,1
14,9
175 055,4
8,8
252 037,5
10,1
Ukraine
37 219,9
7.2
195 834,2
9,8
233 053,5
9,3
USA
18 897,5
3,7
133 211,3
6,7
152 108,8
6,1
Russia
10 288,4
2,0
139 828,3
7,0
150 116,7
6,0
Germany
8 622,6
1,7
135 670,7
6,8
144 293,4
5,8
Italy
11 628,8
2,3
65 263,4
3,3
76 892,2
3,1
Bulgaria
41 921,8
8,1
33 610,3
1,7
75 532,1
3,0
China
1 745,2
0,3
64 927,9
3,3
66 673,1
2,7
Armenia
36 118,5
7,0
21 107,1
1,1
57 225,6
2,3
Other countries 151 460,6
29,4
650 784,4
32,7
802 245,0
32,0
Total:
515 104.8 100,0 1 992 525,8 100,0 2 507 630,5
100,0
Source: Ministry of foreign affairs of Georgia
2. Foreign Trade Statistics
Let me begin my analysis with the comparision of our export basket before and after reforms.
Let’s study what were top goods till 2004 and what are we exporting now. Table 4 shows the
trend about export development in Georgia, from 2008 till 2009.
Table 4. Georgian main export commodities
Position name
January-June 2008
January-June
1000 USD
%
1000USD
Total export:
795 544,0
100,0
515 104,8
Ferro-Alloys
141 657,0
17,8
66 584,1
Gold unwrought or in semi-manufactured
48 289,4
6,1
52 458,0
forms, or in powder form
Motor cars
57 481,4
7,2
38 244,7
Ferrous waste and scrap
82 323,6
10,3
32 001,1
Copper ores and concentrates
73 467,8
9,2
31 342,8
Nitric fertilizers
60 059,9
7,5
28 440,2
Indentured ethyl alcohol, spirits, liqueurs
23 048,5
2,9
27 791,6
and other spirituous beverages
Nuts and walnuts
12 373 9
1,6
26 216,9
Seed flour of oil plants
242,6
0,0
16 265,2
Mineral waters
17 314,3
2,2
13 201,2
Other goods
279 285,7
35,1
182 558,9
Source: Ministry of foreign affairs of Georgia
28
2009
%
100,0
12,9
10,2
7,4
6,2
6,1
5,5
5,4
5,1
3,2
2,6
35,4
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Here is the trend about import development in 2008 – 2009 years and Main import goods of
Georgia looks as follows:
Table 5. Georgian main import commodities
Position name
Total import
Petroleum and petroleum oils
Motor cars
Petroleum gases and other gaseous
hydrocarbons
Medicaments
Wheat
Cigarettes
Sunflower seed
Transmission apparatus for radiotelegraphy, radio-broadcasting or television
Machines and mechanical blocks of Special
destination
Computing machines and their blocks
Other goods
January-June 2008
January-June 2009
1000 USD
3 196 654,6
401 417,2
388 822,1
106 217,0
%
100,0
12,6
12,2
3,3
1000 USD
1 992 525,8
212 386,0
133 809,0
83 349,9
%
100,0
10,7
6,7
4,2
92 892,8
49 643,9
27 411,7
98,2
88 503,0
2,9
1,6
0,9
0,0
2,8
82 467,5
42 429,8
24 378,1
21 378,1
19 763,0
4,1
2,1
1,1
1,1
1,0
31 672,6
1,0
18 297,5
0,9
59 380,7
1 950 595,4
1,9
61,0
17 434,0
1 336 444,1
0,9
67,1
Source: Ministry of foreign affairs of Georgia
It is very important to notice the main import and export production into the country and from
the country: According the Ministry of Economic Development of Georgia the main import
products are: Oil products -12.6%, Motor Cars – 7.6%, Petroleum Gases – 3.4%, medicaments
– 3.1%, Radio – telephonic apparatus – 2.4%, wheat & meslin – 1.8% and flower – 1.2%.
Accordingly main export production is: Ferroalloys – 17.8%, ferrous waste & scrap – 8.6%,
copper – 7.9%, fertilizers – 7.0%, gold unwrought – 6.7%, cement – 5.9%, alcohol beverages
– 3.9%, wine – 2.5%, mineral waters – 2.1% and nuts – 2.1%.
-
Given that the share of exports in goods in the trade turnover is much lower than that of
imports, an additional higher rate of exports growth, as compared to imports will contribute to
the improvement of the trade balance but will not cause any fundamental shifts. In JanuaryMay of 2009 foreign trade turnover was 2009, 1 ml. USD which is 37, 3 percent less than
similar indicator of the last year.
Export 408,3 ml. USD 32,9 % less
Import-1600,9 ml. USD 38,3% less
29
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
3. Current Account Deficit
Over the past three years (2005-07), the current account deficit of Georgia has increased by
2.8 times and exceeded USD 2 billion (19.7 percent of GDP). This development was largely
attributed to a sharp increase in imports which have more than doubled over the same period.
The current account deficit was covered through private capital inflows, primarily FDIs. A
pre-war balance of payments, therefore, revealed no gap.
We saw above that our economy experianced huge increase, same was observed in export
potential, in dollar amounts now we are selling much more than before; it is good that export
expressed in numbers reached 1.5 billion boarder, but it would be interesting to see do we
have changes among top export goods, befor and after reforms;
We have reviewed some leading products, such as scrap metal waste, ferroally, Aircrafts,
Water, Wine, Sugar and Petrolium; Now we will review rest of them, most stabile growth was
experrianced by Mineral Fertilizers, export between years 2002 and 2009 increased almost ten
times, it was 12 mln in 2002 and in 2009 reached 105 mln; the bigest consumers are EU
countries like Italy; Another significant growth was experienced by Gold, mostly during these
years we were supplying gold to Canada and UK; As far as our top export come on scrap
metal, and consumer is Turkey, it is logical that 17% of our export comes on Turkey
comparing 2004 we deepened our export to Azerbaijan, high contributor was cement, in 2008
13% of our total exports were directed to Azerbaijan; we also significantly increased our
export to Bulgaria, mostly on behalf of Fertilizers; if looking on charts carefully you may
discover that in 2008 the category others is more than 40 %, when it was just 32 % in 2004; it
means that diversification of our exports increased by 10%, and it is quite good in order not to
be depended on a single market, this strategy is risky as we saw with Russian case, after
embargo our products trade potential slumped, and it was imposioble to find alternative
markets immediately; Special agreements were achieved with EU about trade, which later
contributed an increase of export; Copper ore and concentrates export increased to EU
countries namely, Bulgaria, Finland and Germany;
So, external demand increase and internal structural reforms, contributed in export
transparency, and of course growth, many companies were given chance to operate in Georgia
freely;
Among the key features of Georgia’s progressive trade policy are the following:
Low Import Tariffs: Import tariffs have been abolished on almost 90% of goods, and only
three low rates remain (0%, 5% and 12%) instead of the previous 16. Georgia levies no import
tariffs on machinery and equipment. The 12% and 5% import tariff rates are levied on certain
types of agricultural products and construction materials. Tariffs are also applied to imports of
alcoholic beverages and passenger vehicles.
¾ No quantitative restrictions (quotas) on imports or exports. There is free trade.
¾ Equal VAT on imported and local goods.
¾ Equal excise tax on most imported and local goods.
30
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
¾ Very limited number of export/import licenses and permits required: As of 2006, the
number of permits for import and export was reduced from 14 to 8.
The statistics show that foreign direct investment inflows have been rising significantly in the
recent years. Countries that make major contributions to the growth of FDI inflow level are the
following: Netherlands, Virginia Islands, Denmark, Turkey, the US, Kazakhstan, Czech
Republic, Russia, Cyprus, and the UK. The greatest part of foreign capital is invested in the
energy sector, which is then followed by services, construction, manufacturing, and
agriculture.
Georgia ranks quite low by the FDI potential index according to the UNCTAD, however its
ranking goes fairly high in terms of FDI performance index, which means that Georgia is
virtually attracting more FDI than it is expected. The econometric analysis shows positive and
strong correlation between the increase of FDI inflows and economic growth in 1997-2009.
This fact emphasizes the utmost importance of attracting more FDI to Georgia.
It is generally assumed that Georgia is becoming an attractive location for investments, based
on the increased volume of investments over the last three years but situation has changed
after Georgia – Ossetian war after which FDI has decreased in the country prior to instability
conditions in the country: there was quite a considerable amount of FDI coming in recent
years and even more due to the constructions of Baku-Supsa Pipeline and the Supsa Terminal
(BP investments) but the amount of inflows dropped substantially in 2009, owing to the
financial crisis, and the level of FDI has remained quite low until today, when it began to rise
due to the changing environment in Georgia after the Rose Revolution.
In order to assess the potential for investment and the policy options for attracting more
investment, it is important to understand the motives of companies that are investing in
Georgia. In other words, one has to look at the micro-foundations of FDI flows, as total and
aggregate figures are often misleading and lead to wrong policy prescriptions. For example, it
is important to note that most of the investment since 2003 can be attributed to the exceptional
influence of the construction of the BTC pipeline and, more recently, the construction of the
gas pipeline (Schmidt, 2007, p. 2).
FDI from EU member countries in 2006 amounted to 407.1 ml. USD (that on 163.4 ml. USD
increase a parameter of the last year). Despite a nominal growth, however, the EU share in
total investments sharply dropped in both annual and quarterly terms. This can be explained
by the fact that the South Caucasus (Shah-Deniz) gas pipeline entered the final phase of its
construction. In 2007 FDIs from EU member countries amounted to 1132.7 ml. USD
(increased by 725.6 ml. USD in comparison to 2006). In 2008 FDIs from EU member
countries amounted to 476.6 ml. USD (decreased by 656.0 ml. USD in comparison to 2007).
FDIs from EU member countries amounted to 81.6 ml. USD in 2009 (decreased by 98 ml.
USD in comparison to same period 2008).
31
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Table 6. Main Countries' Share in the Stock of FDI in 2009
Volume (ml. USD)
% of total
Country
50.1
40.2
U.A.E.
24.8
19.9
UK
23.7
19.0
Czech Republic
21.1
16.9
Turkey
19.3
15.3
Netherlands
12.3
9.9
Japan
9.9
7.9
Virgin Islands
9.1
7.3
Panama
Total
124.7
100
Source: Ministry of foreign affairs of Georgia.
http://www.mfa.gov.ge/index.php?lang_id=ENG&sec_id=76 (last visit: 15.09.09)
According to “Easy of Doing Business 2009" Report of The World Bank (WB) and
International Finance Corporation (IFC) and also The Ministry of Economic Development of
Georgia, in terms of the pace of economic reforms and ease of doing the World Bank ranks
Georgia on 11th place in 2009, 15th place in 2008 up from 37th in 2007, 112th in 2006 and 134th
in 2005.
According to the Ministry of Economic Development of Georgia, main investor countries in
2008 and 2009 were:
• United Arab Emirates – 273, 14 ml. USD
• Turkey – 165, 02 ml. USD
• Netherlands – 145, 72 ml. USD
• Virgin Islands – 144, 28 ml. USD
• USA – 116, 30 ml. USD
• UK – 111, 81 ml. USD
Investment inflow slowdown caused poverty in the country on micro level. Poverty continues
to be one of the main sources of human misery and at the same time a serious obstacle for
democratic development in Georgia. The great section of the population lives on the margin
of, or below, the poverty line (People whose per capita income does not cover the cost of a
minimum specified calorie intake within the family are considered below the poverty line
(PL)). Economic growth is having strong influence upon reduction of poverty. However,
inequality stays remarkably high. Poor living conditions, failing utilities and dirty environment
are among most apparent signs of poverty. The reduction of poverty is impossible without
serious improvement of the living conditions. The most worrying fact about poverty now is
that not only is it so widespread but it appears to be on an increase. On this purpose I did My
Own Findings about Poverty:
Background and Purpose: Transition is a dynamic historical process, imposing change on
almost every element of society. Assessing the progress of Georgia during transition period is
a complex undertaking in any area, including economics. Success in recovering output,
32
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
however, readily suggests itself as a useful unifying theme for economic assessment and the
process is important for the welfare of the country. Based on quantitative analysis, this article
based on which I did these findings identifies factors that have encouraged the expansion of
output and points out several lessons for achieving consistent and sustainable economic
growth. No such survey was done before to analyze the outputs resulted by hard life of
Georgian family and our survey is done for this purpose.
Transition period implies:
9 liberalizing economic activity, prices, and market operations, along with reallocating
resources to their most efficient usage;
9 developing indirect, market-oriented instruments for macroeconomic stabilization;
9 achieving effective enterprise management and economic efficiency, usually through
privatization;
9 imposing hard budget constraints, which provides incentives to improve efficiency;
and
9 establishing an institutional and legal framework to secure property rights, the rule of
law, and transparent market-entry regulations.
Method: We identified all major problems of Georgian family between 2000 and 2009 by
conducting a survey of 300 respondents – 150 students from different universities of Tbilisi
and 150 residents of Tbilisi - to find out what is the influence of market economy on Georgian
family using a simple questionnaire.
Results: Survey results out of 300 respondents are like this:
• Average monthly income of the household with lowest income level in 2009 equals GEL
118, average monthly income of the richest household constitutes GEL 710.6, i.e. 6 times
more (75% respondents’ opinion).
• Distribution of the expenditures is not appropriate (70% of respondents’ (300 respondents)
opinion).
• Food expenses constitute the most portions of the household costs (85% of students’
opinion and 95% of residents’ opinion).
• Unemployment is a very important factor defining extreme poverty level (97%
respondents’ opinion).
• The risk of households to live below the poverty line is increasing according to the number
of unemployed members in the family. Out of 40% of the households below poverty line no
single member of the family is employed. Out of almost 45% of poor households, one working
member of the family has to support two or more other family members including self on
average (87% respondents’ opinion).
• Official subsistence minimum is the amount of GEL 120 – 125 per month for an adult
equivalent to the age of men with working capacity (73% respondents’ opinion).
• Extreme poverty line – as of today GEL 50 – 55 per month for an adult with working
capacity (66% respondents’ opinion).
• 85% of teenagers and young population does not have any income and they live on
parent’s money; 15% of some students work after lectures late at night and help the family
33
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
(2006 year results). 35% of teenagers and young population does not have any income and
they live on parent’s money; 65% of some students work after and during lectures to help the
family and sustain themselves (2009 year results).
• People who live in town are provided with goods and products they grow but they have
low salaries (81% respondents’ opinion).
• 80% of big families could not sustain family because of low family income: 50% of
average family income is from 100 to 300 GEL; 55% of average family income is from 300 to
500 GEL; 5% of average family income is from 500 to 800 GEL - (82% respondents’
opinion).
• Main sources of income is: working for government – 60%, commercial business – 30%,
other – 10% (75% respondents’ opinion).
• Wages have increased compare with previous years but family’s monthly salary is not
enough from month to month for all family expenses (92% respondents’ opinion).
• 90% of family conflict arises because of poor economic conditions and 5% of husband’s
alcohol abuse (76% respondents’ opinion).
• 40% of main economic problems effecting Georgian family is the poverty - 50% is
unemployment (92% respondents’ opinion).
• 80% is law salary and 80% - high taxes (85 % respondents’ opinion).
• The wellbeing of Georgian family relies on economic development of the country (97%
respondents’ opinion).
• Unemployment rate is higher in villages than in towns (93% respondents’ opinion).
• The percent of population living in poverty is high in Georgia (81% respondents’ opinion).
• 80% of the population does not have insurance at all (87% respondents’ opinion).
• The number of beggars and homeless people decreased but still exists in the country (83%
respondents’ opinion).
• The wages and salaries earned in the private and public sectors, income received from
private farms, and income earned in small business are very low (80% respondents’ opinion).
• The average size of the salary was 4-6 times less than the minimum value of a consumer's
basket but this rate has increased comparing last years (95% respondents’ opinion).
• Employment in public sectors has decreased, factories does not work, so in recent times
employment in the private sector has kept expanding (76% respondents’ opinion).
• 35% of the population of Georgia is engaged in the private sector of agriculture (63%
respondents’ opinion).
• Half the population lives below the poverty line (55% respondents’ opinion).
• 20% of the economy is agriculture with 40% of the population employed in this sector
(87% respondents’ opinion).
• 10% of richest people still have well over 40% of incomes (86% respondents’ opinion).
• 69% of the families with no member of working age have incomes below the minimum
subsistence level (88% respondents’ opinion).
The process of democratization and transition to the market economy in Georgia has in the
first place brought changes and positive consequences. Georgian market economy and
increased investment flow influenced in a good way on Georgian family but Georgia still
34
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
needs economic development and reduction of poverty in the country, so the problems with
special impact on the welfare of the country and its citizens, economic situation and poverty
must be solved. We think that production factors can be increased only via attraction of
foreign direct investments.
Since it is not easy to revive the confidence of investors, especially under the global financial
crisis, the country should apply the existent political risk insurance mechanisms. Country
needs to apply extraordinary methods for the attraction of new investors. In this regard it
seems reasonable to grant them some of those privileges, including tax breaks which can be
enjoyed only by he investors operating under effective legislation in the free industrial zone,
for a certain period and throughout the country. Moreover, special benefits should be offered
to those investors who would invest their capital into export – oriented industries and create
new jobs. There are key points and recommendations to which country should pay attention.
These are:
- Freedom to conduct foreign trade activities
- Liberalization of trade and diversification of foreign economic relations in an environment
of fair competition as essential elements of foreign trade policy
- Accession to World Trade Organization (WTO) as confirmation of Georgia’s commitment
to liberalization and integration to the world economic system.
- To restore confidence to the banking sector, a deposit insurance system needs to be set up in
the country in the near future which would ensure some protection of depositors’ interest in
the case of banking institutions going bankrupt
- Development of a network of multilateral and bilateral trade and economic agreements.
- Agreement for creation of common agricultural market.
- Other trade and trade related agreements.
- There should be no restrictions on importation of goods, except those applied for health,
safety, security and environmental reasons.
- No quantitative restriction.
- Specific (fixed) customs fee.
- Internal taxes applied to imported and domestic products – VAT and excise tax.
- In general, the lack of transparency and frequent and sudden changes of rules and regulations
governing foreign trade may create delays and additional costs for traders. Availability of
information through publication of regulations and guidelines relating to procedures and
requirements is important for ensuring transparency.
- Publication of new laws and regulations in advance would make the trade predictable.
- Ensuring independent review of customs decisions.
- Simplification of procedures and reduction of data and information required.
- All traders shall be treated impartially.
- Procedures shall be the same for different modes of transport.
- Requirements shall be kept to the minimum that is needed to ensure the safety, security and
streamlined flow of goods and services.
- Blockade by countries is harmful for all trade partners in the region.
- There should not be difficulties faced by businesses during the transit through Georgia.
- The use of international standards shall be encouraged.
- Development of customs and transport information system.
35
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
- The importance of technical assistance by international organizations and donor countries
(Kakulia, 2008, p.10).
4. Conclusion and Recommendations
Georgia has made considerable progress on improving certain aspects of the investment
climate. However, there are many areas that still need attention. As Foreign Direct Investment
(FDI) is a huge perspective to bring capital, productive facilities and technology transfers as
well as new jobs and management expertise to Georgia and as we know that long term effects
of foreign investment will result in increased employment and household income, poverty will
be decreased and Georgian economy will be developed then FDI is a huge importance for the
country still today. Georgia attracts Foreign Direct Investors but still needs improvements in
the business climate for the implementation of a few visible actions in the strategy of
attracting FDI. Despite the progress in the liberalization of business environment, much is still
to be done. In particular, property rights are not fully secured; transparency, protection of
property rights and expropriation problems still exist. In Georgia this danger has to be
regarded as high. Although on the decline, corruption remains high and non-transparency
prevails in many places. This raises serious doubts on the application of the mentioned active
trade policies that are highly sensible to careful implementation. There are some problems in
judiciary too. The closing of a business in Georgia requires twice as much time as in OECD
countries. The bankruptcy practice is inefficient. The dispute resolution at courts is, in
businessmen’s opinion, biased. It can be said that the reforms in judiciary lag behind the
liberalization of business environment.
Despite unstable economic environment and territorial conflict Georgia has a high potential
for long term relations with foreign investors and developing different spheres of industries.
It’s important to stress that there are no single solutions to this problem. Effective reform must
be directed to change the system in the better direction. To be on the top of the list of countries
for extended FDI and multinational production Georgian authorities have to take into account
the following list of factors driving FDI inflow:
• Political and economic stability (to reduce investment risk and provide reasonable
predictability for making business decisions).
• Government behavior that facilitates doing business.
• An FDI legal framework in line with the best international practice (with security of
property and persons and enforceability of contracts).
• An enabling environment for domestic market growth including adequately developed
infrastructure and human capital. The availability of all these conditions to all companies
automatically and by law (without a need for a special treatment and discretionary decisions
by officials or civil servants).
The results of analyzes revealed serious problems with protection of owner’s rights, though
Laws and regulations in the area of corporate governance have been substantially amended.
The level of the investment activity in Georgian capital market (and especially through public
trading) is still quite low because of the various reasons including the deficit of the investment
36
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
resources, lack of the attractive investment objects, low level of the standards of the corporate
management and deep prudence of foreign investors. Along with this it should be noted that
notwithstanding the short period of the experience of regulation the major problems have been
underlined in the field of protection of investors (imperfect legal basis, mistakes made in the
process of mass privatization, utilization of the processes of reorganization for redistribution
of the shares and for discharging the undesirable shareholders, ignorance of the shareholders
and disregarding of their rights by the managing bodies and other) and the possible trends of
solution.
Georgia needs to ensure that its medium-term fiscal position is compatible with its balance of
payments, monetary and inflation targets. Special attention is needed as well to support small
and medium-size enterprises, including establishing business incubators, an effective crediting
system, and informational services. Development of the country depends, to a great extent, on
efficient utilization of its natural and geo – political resources. The country is quite rich in
different minerals, especially in hydro resources. Another important resource is the
geographical location of the country and its transit potential both in east – west and north –
south direction. Legal sector has been conditioned by poverty of the population, limited
investment resources and extreme restriction of the investments for local legal investments so
we think that production factors can be increased only via attraction of foreign direct
investments. In addition:
1. We consider inevitable that for the mobilization of domestic investment resources and
development of market liquidity, distinct portion (share) of privatized units should be sold
using stock exchange mechanisms.
2. Property and control structure should be more transparent and easy to access. For this
reason, improvement of legislative base and as well as reinforcement of its practical
realization mechanisms are very important.
3. Property right registration should be implemented by independent body.
4. In Georgia, the dependence, in general, concerning regulations and approach “no
regulation” should be changed to “less regulations” or “better regulations”. Financial sector
regulations should be based on best international practices and tendencies, it concerns
especially financial openness and monitoring of activities that is impossible without financial
plural accounts and acknowledgement of appropriate audit standards and what is a most
important without a realization in practice.
5. Market competitive regulation mechanisms should be strengthen, which excludes
discrimination of state privileges and assistances, as well as in the process of privatization and
state acquisition, tenders. It will strengthen investors’ beliefs, that their rights will not be
humiliated not by State and private sector as well. Besides, this, consolidation of competitive
regulations will create guarantees that from the side of already existed participants in the
market not to establish or reinforce market entry barriers.
6. Investment policy, as well as changes in any sphere of economic policy should be the
subject of RIA analysis in order to evaluate regulatory operations (actions) / inactivity
influence considering all interested parties interests, complexity of regulatory processes should
be ensured and society interests in these processes should be considered.
7. Besides that, serious measures for the welfare for the expiration of ensuring transparency
of already existed norms should take place.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
8. It is designated that in spite of current world processes (including making regulatory
regime more severe) declaration of future growth of economic freedom systematically takes
place in Georgia (one example is initiation of Liberty Act), though ensuring such guarantees
of economic freedom like defending private property and establishment of free competition
conditions are frequently ignored.
9. It should be noted that at the same time of recognition of so called Liberty Act changes
about investment activities were implemented, by which guarantees and their protection
mechanisms for investors actually will deteriorate. We consider that these are steps taken
backwards and old editions must be restored. Administration is another problem.
10. Recently, domestic financial control became especially more active, all these aggravate the
feelings of not forecasting and inobservance that is reflected negatively on investment activity.
11. Increased investment influence on the development of small industries and forming more
active partner relationships and export opportunities for the last period is not observed at all.
Influence on overcoming poverty problems is still less observed and effective.
Above mentioned is indicating once more that attracting foreign investment automatically do
not stipulates the achievement of main goals of country’s development and for the growth of
the influence the economy of the country and society prosperity and wellbeing complex,
investment policy (which will be established on consequent analysis and encouragement of
those investment which will take care of realization of country competitive advantages) draw
out is very important. Concretely:
•
Country should improve investment climate, which will be competitive compared to
other countries. For this reason:
9 Government should estimate and consider investment encouragement measures, so, the
political and social price of motivations, environment protection expenses, and etc. (for
example, to export capital and profit freely is very costly for the country, because foreign
investor is not interested in reinvestment in his/her own country, which would strengthen
country’s financial situation).
References
Dee, P. and J. Gali (2003). “The Trade and Investment Effects of Preferential Trading
Arrangements”, NBER working paper 10160 (Table 1-2).
Department of Statistics of Georgia, (2009). www.statistics.ge
Georgian Economic Overview, (May 2009). www.georgia.gov.ge (last visit: 10. 09, 2009)
http://www.investingeorgia.org/news/view/1438 (last visit: 01.10.2008)
Jalilian, H., C. Kirkpatrick and D. Parker (2003). ‘The Impact of Regulation on Economic
Growth in Developing Countries – A Cross-Country Analysis’, mimeo, Centre on Regulation
and Competition, IDPM, University of Manchester.
Kakulia, M. (2008). Challenges and Prospects of Economic Growth in Georgia; pp.2–3.
38
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Ministry of economic development of Georgia, (25 March, 2009). Meeting with the
representatives
of
the
American
Chamber
of
Commerce
in
Georgia.
http://www.amcham.ge/photos/luncheon_2009-0325/Ministry%20of%20Economic%20Development.pps#289,2 (Lat visit: 15. 09. 09).
Ministry of foreign affairs of Georgia.
http://www.mfa.gov.ge/index.php?lang_id=ENG&sec_id=76 (last visit: 15. 09. 09).
Morrissey, O. (No. 08/2006). “Investment Provisions in Regional Integration Agreements for
Developing Countries”, CREDIT Research Paper, pages 12 - 17.
Milner, C., O. Morrissey, and E. Zgovu, (2007). “Adjusting to Bilateral Trade Liberalization
under an
EPA: Evidence for Mauritius”, University of Nottingham, School of Economics:
CREDIT Research Paper 07/11.
U.S. Department of State, Diplomacy in Action, 2008 Investment Climate Statement –
Georgia, 13 April, 2009.
Papava, V. (2006). The political economy of Georgia’s Rose Revolution; East European
Democratization.
Schmidt, M. (2007). “Foreign Direct Investment to Georgia: Can Active Investment
Promotion Policies Make A Difference?”, page 2.
www.geplac.org/newfiles/reports/4.Michael Schmidt. PDF (last visit: 23. 03. 2009).
World Bank Group, (2009). (Last Visit: 20.09.09)
39
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Charalampos MITSIDIS
Les Roches International School of Hotel Management, Switzerland
[email protected]
STORMY BALKANS: PERCEPTIONS OF SAFETY CULTURE AND SOCIAL
CHANGE IN GREECE AND SERBIA
Abstract
Greece and Serbia are used as case studies to test existing theories of culture and assess
contemporary perceptions of risk. Existing models suggest that both countries should present
high collectivity and high risk aversion. Respondents in four organizations per country
(manufacturing, service, education and one state-owned) were questioned concerning their
overall perceptions on their way of life and their attitudes toward safety and risk. The results
indicate that, contrary to most existing approaches on comparative culture, both countries lean
more heavily toward the individualistic way of life. Both samples fear existing institutions
most and see them as incapable of guaranteeing a risk-free professional or social future. The
evidence is partially explained as a result of ‘transition shock’ to true market economies which
can be seen as a ‘crisis’ in its own right, dictating individualistic behavior. Such behavior is
deemed more suitable for effective handling of crises as the individualist sees risk as an
opportunity rather than a problem. However, in order to overcome the lack of continuity and
long-term focus inherent in individualism, a new model of safety culture is necessary, with the
key element being education in trust and cooperation.
Keywords: Culture, Risk, Balkans.
1. Introduction
In an era where cultural boundaries are becoming increasingly blurred, the term ‘culture’ itself
misunderstood or misused, and business recommending cultural awareness and sensitivity, a
study of culture, risk perception and its consequences on safety and social change appears in
place. Even if safety values are hard to quantify and the exact definition of what constitutes
culture an area of considerable theoretical and practical disagreement, typologies of cultural
propensities can be a helpful guide to policy making. This is especially the case as institutions
at the supranational level are becoming more common, particularly in European countries.
The aim of this study is to test cultural theory in the ‘four ways of life’ approach developed by
Thompson, Ellis and Wildawsky (cited in Smallman and Weir, 1999) based on the original
grid/group dimensions of culture as first expressed by Douglas. The grid dimension of culture
seeks to understand the extent to which people are constrained by rules and regulations or not;
while the group dimension studies culture from the prism of people’s belonging to a larger
collectivity or not. It can be argued that insofar as individualist American culture has
permeated world culture considerably, with its view of the ‘self made man’ and the ‘frontier
mentality’, world culture itself may be shifting more and more toward low grid and low group
40
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
dimensions. This proposition, however, is rather contentious and fails to understand the
strength and durability of ‘home’ cultures. This study’s first objective will, therefore, be to
identify the extent of the grid/group dimension in two countries which will form part of the
comparative analysis, Greece and Serbia, and to classify these countries in a position within
these dimensions.
The above aim is rather descriptive in nature and will be the outcome of empirical research;
following this, however, an interpretation of the scores will be attempted, and this
interpretation will go hand in hand with a re-examination of existing literature on culture in
general and the development of safety culture in particular. Therefore, the second aim of this
study, is a critique of existing paradigms in light of the results obtained here, and the
assessment of whether the safety background of the countries studied is adequate or not.
A final aim, as a consequence of the above, is to draw on the literature of crisis management
and suggest practical ways in which it would be possible, if deemed necessary, to improve
existing frameworks of dealing with safety breaches in Greece and Serbia. In this sense, this
third aim is more managerial in nature, while still retaining cultural sensitivity by operating
within the ‘way of life’ framework uncovered as a result of this research. It is dangerous to
suggest that one way of life, and subsequently one perceived method of reacting to crisis, is
the ‘best one’. Cultural relativity demands that disparate cultural elements are all respected as
expressions of a particular mindset which seeks continuity and stable change rather than being
uprooted, and management practices must follow as a result of these frequently dynamic and
changing cultural patterns.
The study will begin with a consideration of cultural theory in general and the two prevailing
ways of perceiving culture which result in diverging managerial approaches in general, and
with regard to safety issues in particular. Further importance will be placed on issues of
cultural and social change, and how the grid/group distinction may have an effect on these.
Moreover, safety culture and risk perception will also be subject to theoretical consideration as
concepts that can assist the risk manager to create more effective frameworks for prevention
and intervention. Greece and Serbia, as case studies, will also be presented briefly from a
cultural perspective, and existing theories of comparative culture briefly evaluated.
The study proposes to examine employees in organizations within Greece and Serbia in order
to examine their perceptions on culture in general and safety issues in particular. To this
extent, semi-structured questionnaires are deemed to be the most suitable tool for the purposes
of this study, allowing for an examination of cultural perceptions on the one hand and specific
risk anxieties in life and in the workplace on the other. This chapter will also include a section
on the multiple limitations of the research, as well as an examination of the ethical
ramifications of conducting research on sensitive issues such as safety and crises.
This study is relevant within the current discourse of crisis management as it links culture,
perceptions and management of safety issues, in this way giving considerations to social,
individual and business levels at the same time. It is deemed that only such a trilateral
consideration can result in the development of appropriate safety frameworks. The choice of
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
countries in the case study is also relevant, to the extent that in both countries a number of
considerable crises have occurred in the last years which have, however, not been the object of
adequate study at an international level. Serbia was subject to a devastating war which ended a
mere twelve years ago, to the worst inflation in history in 1993, as well as to the NATO
bombing between March and June 1999. Greece’s recent safety issues have been devastating
fires in the summers of 2006 and especially 2007, the deadliest aviation disaster in the
country’s history in 2005, as well as the constant threat of earthquakes. While culturally
sharing a number of elements such as religion and a history of conquerors, recent political
developments make the countries studied considerably different; the exercise of comparing
their cultures as they relate to risk is a useful beginning for similar studies of a Pan-European
nature, which are more than necessary if an integrated approach to risk is ever to be attempted
seriously.
2. The Existing Literature
Perhaps no other term has been shrouded with different nuances of understanding and a
variety of definitions as the term ‘culture’. Bodley (1994), cited in Barthorpe et al (2000)
defines culture differently according to topical, historical, behavioural, normative, functional,
mental, structural and symbolic functions. In terms of perception, perhaps the most relevant is
his definition of culture as mental as ‘a complex set of ideas, or learned habits, that inhibit
impulses and distinguish people from animals’. Geert Hofstede (1990, 1991) defined culture at
'mental programs', or 'software of the mind', which can create patterns of thinking, feeling and
action, and by virtue of this simple definition, the complexity of the term becomes clear.
Locatelli and West (1998), citing Ott who has based his work on Schein’s cultural pyramid,
discuss culture in terms of artefacts, patterns of behaviour, values and beliefs as well as basic
underlying assumptions. Linstead and Grafton Small (cited in Hopfl, 1994, p.50) more
specifically define corporate culture as ‘the term used for a culture devised by management
and transmitted, marketed, sold or imposed on the rest of the organisation’. This definition is
quite contentious, as it can be easily questioned what the origins of culture are and whether it
can be simply ‘devised’, let alone marketed and sold effectively. Nevertheless, corporate
culture is considered an integral part of organisational strategy formulation (Barthrope et al,
2000). Culture is multi-layered and complex (Collard, 2007) and ‘not a static entity, but a
complex and dynamic system of beliefs and symbols on human activity’ (Rozakis, 2007)
which are always amenable to unpredictable change. The concept of isomorphism (Toft and
Reynolds, 2005) can be applied to world views as well; learning takes place as paradigms are
considered, accepted or rejected, and basing a paradigm on other events with similar features
is a valid way of (re)creating culture. Likewise, the concept of cognitive dissonance finds its
origins in culture: in order not to have inconsistencies between attitude and behaviour, people
tend to bind these with the ‘glue’ called culture.
The management of change into the 21st century certainly requires consideration of a new way
of thought on the part of employers, with commitment from senior management, clear setting
of safety policies and an ability to delegate authority (Cooper, 1995) seen as essential. Culture,
including safety culture, has often been considered the territory of management with the
implication that management has the right to manipulate certain aspects of work, ‘in the
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
pursuit of corporate consensus, organizations seek to ‘colonise’ the non-rational, corporate
culture functions to conceal discrepancies and to gloss over the dysfunctional’ (Hopfl, 1994).
While it is beyond the scope of this paper to discuss this rational or irrational character of
culture, as well as the question of where this originally develops from, this debate assists in
delineating the dual nature of the theory on culture, especially safety culture, which has
implications for the role, as well as the ‘rights’ of management.
Dimensions of Culture and Organisations
In order to understand different ‘ways of life’, the starting point of cultural theory is founded
on the work of Mary Douglas and her grid/group dimensions of culture. Grid refers to ‘the
total body of rules and constraints which a culture imposes on its people in a particular
context’ (Mars and Nicod, cited in Scarman Centre, 2006b, pp.4-7) while group ‘refers to the
extent to which an individual is morally coerced by others, through being a member of a
bounded face-to-face unit’ (Mars and Nicod, cited in Scarman Centre, 2006b, pp.4-8). Based
on whether these are low, or high, the subsequent grid, representing four ways of life, can be
generated. These are:
•
•
•
•
Individualism, with weak grid and weak group
Egalitarianism: weak grid, strong group
Fatalism: strong grid/weak group
Hierarchy: strong grid, strong group
Each on these four ways of life implies a very different perception of risk and, therefore, a
disparate framework for risk management can be expected. According to Scarman Centre
(2006b, pp.4-15), the individualist will tend to disregard risk as a phenomenon that is unlikely
to ever occur, seeing it as a random event or as an opportunity. Without risk, there would be
no entrepreneurs, since there would also be no opportunity for personal reward (Smallman and
Weir, 1999). The egalitarian, on the other hand, seeing himself as part of a system, will view
risk as an omnipresent threat, especially as potentially originated from ‘others’, beyond the
group, yet is risk averse through experience (Bellaby, 1989) The egalitarian has an ‘internal
source of power’ (Bellaby, 1989, p.6) The fatalist, bound by rules of which he has little
control, does believe in risk and disaster, but simultaneously rests unable to do much about it,
accepting disasters as inevitable. Finally, the hierarch, as a rational player, will see disasters as
resulting from rule breaking or individualistic acts. He is likely to ‘accept high risks on
condition that decisions are made by experts and disasters are blamed on rule breaking’
(Rozakis, 2007, p.203); therefore, it is the hierarch who is likely to develop the most rational
safe management system and attempt to socialise all members of the group so as to minimise
risk.
It must be noted that these four ways of life are theoretical tools which clearly try to fit facts
into prescribed categories, occasionally, if not often, blurring differences significantly. If the
complexity of culture and its expression, as stated above, truly exists, then in the ‘real world’
it is questionable if such an ‘exclusive’ theory is, in fact, optimal. Additionally the issue of
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
‘shifting’ from one risk culture to another throughout one’s life span is also a blurry issue; the
entire discussion of the generation gap could well be understood as a difference to the degree
of desired risk aversion, with one generation taking the role of the previous one as it ages. Life
course transitions are often means to bridge the gap between attitudes and are often markedly
distanced from the theory. Nevertheless, the theory alone is a truly useful tool which
delineates important differences between societies, and it will be the starting point for this
research.
Webb (1999) has made a further typology of emergency organisations based on tasks – regular
or not – and structures – old and new. The resulting typology of four organisations therefore
involved:
•
•
•
•
Established organisations (regular task/old structures) i.e. army
Expanding organisations (regular task/new structure) i.e. volunteers during a disaster
which ‘expand’ the authority and the scope of the army’s involvement
Extending organisations (non-regular task/old structure) which participate only
fleetingly in a particular aspect of a disaster situation
Emergent organisations (non-regular task/new structure) which are often ad hoc
groupings developed to respond to a disaster situation.
The preponderance of one or different types of these organisations may well be a reflection of
culture. In cultures where old structures may be weak or have collapsed or are viewed with
suspicion, it can be expected that risk will be dealt with by ‘expanding’ or, especially,
‘emergent’ organisations in a more ad hoc fashion, which sometimes can be as effective as the
‘structured way’ [cf. in the case of the spillage of the Exxon Valdez in Alaska, local
fisherman, who were part of the Cordova District Fishermen United, acted in unison in order
to protect their areas of interest, the hatchery stock, from the oil (Browning and Shetler, 1992,
p.486)].
Issues in Cultural Change
It can be assumed that one of the tasks of a risk manager is to increase sensitisation of the
public, whether within a particular organisation, or in society as large, to the issues of risk that
surround it, with a view of thereby increasing knowledge, subsequent individual and group
abilities to prevent risk, and to manage possible disasters. To this extent the risk manager is, to
a certain extent, involved in changing cultures, organisational, national, or even supernational, to create a more responsible and effective disaster response.
What exactly changing culture entails will remain an issue of debate. It has been claimed that
it takes up to five years to change culture (Dilley and Kleiner, 1996) although behaviours can
be changed in a quarter of a time based on the application of ‘motivation’ in the form of
rewards and punishments. Change becomes necessary when ‘the established patterns no longer
serve, at least to the required degree, the purpose of an organisation’ (Mitroussi, 2003). The
most facilitating factor for cultural change is the experience of a dramatic turning point
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
(Harrison, 1995), provided that this is ‘correctly’ understood or perceived by the members of
the group. Borgelt and Falk (2007) identify four stages to an ‘intervention’: the trigger stage of
identifying a problem, the initiating stage, a largely informal method of sensitising people to
the need for the intervention, then the development stage, where a more formalised procedure
takes place, and finally, the management and sustainability stage, where ideally the cultural
‘change’ can be solidified by avoiding complacency and a return to older perceptions or
behaviours.
The application of the above to issues of risk and safety is complex for a number or reasons.
Safety culture is ‘composed of the beliefs, norms and attitudes of its members towards safety’
(Scarman Centre, 2006d, pp.1-15). Hopfl (1994) makes a very clear and useful distinction
between corporate culture and safety culture and the inherent contradiction between the two
terms. As corporate culture attempts to usually reinforce an ‘us’ versus ‘them’ rhetoric based
on invulnerability, coherence and order, this comes in contrast to the fact that concern for
safety issues by its nature is part of the expectation for a non-orderly interruption to this
invulnerability, which also necessitates isomorphic learning or inter-organisational
cooperation. One of the greatest barrier to the sound development of an accepted safety culture
is resistance to change, which can be assumed to be ever present especially under the
functionalist paradigm where the division between ‘them’ and ‘us’ is conspicuous and where
the understanding of safety culture may be very different for different groups, especially
between management and shop floor workers (Harvey et al, 2001).
It is resistance to change that renders paradigms such as that by Borgelt and Falk optimal for
piecemeal issues which require solving, but clearly problematic to wide concepts such as
culture where a single ‘textbook’, ‘step by step’ approach to change has yet to be proven
widely accepted. Therefore, though ‘policy and framework are necessary, [...] since culture is
both a product and a moulder of people, the emphasis should be on ‘organisational learning’
which recognises a long-term process’ (Toft and Reynolds, 2005, p.29). For this learning to be
most successful, ‘active learning;, implying not only knowing something but also taking
remedial action to improve faults that have been found, is essential. Moreover, according to
Waring (cited in Scarman Centre 2006, pp.6-14), it is not possible to train safety culture i.e.
sessions or slogans are not sufficient for culture to develop, which means that cultural change
itself is extremely complex. This is especially so due to contradictory beliefs that people hold,
which implies that their cultural allegiance, especially in terms of ‘way of life’ may shift
depending on the issues at hand or the prevailing mood. This brings into the discussion the
very ‘grey’ area of emotions, and the existence or not of emotional intelligence (Goleman,
2002) and inspirational leadership ability to push active learning rather than to enforce mere
‘passive learning’, which results in conformity rather than cultural regeneration and enhances
safety. The correct ‘manipulation’ of a possible dramatic crisis in order to transform culture
largely rests on skilled leadership’s motivations and ability to institute change as a positive
consequence of frequently negative, or even life-threatening, crisis. To this extent, crisis may
well be one of the prerequisites to cultural change itself. Ultimately, it has been consistently
found that attitudes to safety are context dependent (Cheyne et al, 2002) and depend on the
industrial context mainly; and ultimately the debate around functionalist or interpretative
paradigms may well be seen in a different light as the endless debate between natural scientists
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
who stress the rational and objective versus social scientists who reiterate the social character
in the construction of risk (Hood and Jones, 1996) and therefore safety culture.
Smallman and Weir examine cultural shifts using the group/grid dimensions of culture, and
make a number of interesting observations based on their belief that ‘there occurs a cultural
shift at times of crisis, whereby hierarchists, egalitarians and even fatalists will converge
toward more individualistic behaviour’ (1999, p.38). According to the authors, it is
bureaucratic, hierarchical organisations (or societies) that will be most deeply affected by
crisis, as prior to a crisis, the rigid formalism will prevent adequate communication, while
during a crisis, they predict a collapse of formal structures and an abandoning of rules. The
recommendation is a more individualist, or as they label it, entrepreneurial, culture, in which
adequate communication beforehand and more fluid rules ensure better crisis management.
Two final words of caution are due. Firstly, it is tempting, and perhaps convenient or
politically expedient, to accord system failure or the appearance of risks to problems of
culture. The ambivalence and vagueness of the term ensure that in apportioning blame,
essentially nobody and nothing specific is really blamed. A case in point is the explosion at the
Union Carbide Factory in Bhopal, discussed by Perrow (1999). In this case, the accident was
explained off due to substandard conditions which were a result of Indian ‘culture’.
Nevertheless, a few months later, a similar plant in Virginia, U.S. had a similar accident,
which could clearly not be deemed a result of U.S. ‘culture’. Secondly, as Perrow also
mentions, in systems which are tightly coupled, to the extent that there are many sociotechnical factors working together to create high risk, ‘culture’, though it may well play a role,
should not be accorded the most important one. Nor could the creation of a ‘perfect’ safety
culture, whatever this might entail, neatly dismiss the possibility of risk and disaster which
looms within the system.
Comparative cultural research and the cases of Greece and Serbia
Safety culture is one of the predominant issues which underline the development of safety
policies within organizations and yet it seems to remain one of the issues that are ill-defined
and equally ill-measured (Harvey et al, 2001). Research on this issue in the southern Balkans
has been constrained for a variety of reasons, particularly lack of resources and the absence of
sufficient interest and/or expertise in this field. This piece of research will attempt to fill this
void in research by comparing the underpinnings of safety culture in the workplace in Greece
and the Republic of Serbia.
One of the major works in comparative culture has been the work of Geert Hofstede (1980),
carried out in the workplace of more than fifty countries from 1967, and continuing well into
the 1980s in its various versions. While there are many arguments against using the work of
Hofstede, both from a methodological perspective of accuracy and concerning the issue of
dynamic change of culture, nevertheless, this is a seminal work which points to certain
directions. Hofstede identified initially four, later five, ‘dimensions’ of culture in the
workplace, which both typify each country and can be used to understand the cultural
implications of attempts for cultural change. The original four dimensions were power
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
distance, uncertainty avoidance, masculinity/femininity and individuality/collectivity.
Hofstede’s research included Greece and the former Yugoslavia; it is a matter of interpretation
whether the scores for Yugoslavia could be usefully ‘translated’ into those for today’s Serbia.
Greece and Serbia share high power distance, meaning the extent to which there is a marked
division between ‘management’ and ‘employees’. They also share a tendency toward
collectivity, according to Hofstede, which immediately gives a direction toward the
expectation of their location along the ‘group’ dimension. This is also supported by more
recent research in Serbian businesses (Zabkar and Brencic, 2004). However, Greece is seen as
more masculine i.e. more competitive and status-conscious, though the result for communist
Yugoslavia thirty years ago may not be valid today. Similarly, both cultures point toward high
uncertainty avoidance, the dimension most interesting from a risk analysis perspective.
Uncertainty avoidance implies the extent to which a culture tolerates difference and is risk
averse. Cultures with high uncertainty avoidance will, therefore, find it difficult to accept
change easily and are expected to work hard to ‘protect’ themselves against (emotional) risk;
this, however, does not necessarily imply a thorough framework of safety measures, as
religion or law (in the sense of bureaucracy) are more frequently the tools for such ‘protection’
rather than a rational identification of safety issues that need to be handled. In the whole
sample of countries studied by Hofstede, Greece was found to have the highest uncertainty
avoidance, with a score of 112 going beyond the scale! Yugoslavia’s score is significantly
more reasonable, yet still this (no longer existing) culture can still be classified as having
higher than average risk avoidance. Collard notes one of the faults of Hofstede’s research in
epistemological terms as ‘describing groups and nationalities in essentialist terms of
contrasting beliefs and values as a form of generalisation’ (2007, p.745) is scientifically
dangerous. Another critique of the work of Hofstede found it to be ‘a good indicator of
cultural values and representation, but not of practice’ (Harvey, 1997). In this piece of
research conducted in Germany, the author found that beneath the standards and regulations
typifying Germany’s high uncertainty avoidance and power distance, there was a complex
series of ad hoc behaviours which Hofstede’s theory fails to address. This illustrates both the
danger of resting too tightly on theory and the significant layers existing in culture and
reproduced on a daily basis.
Given the methodological and financial difficulties of comparative cultural research, as well as
the marginalisation of the countries of Eastern Europe, it is not surprising that there are few
studies which have had Hofstede’s scope. Nevertheless, a useful, more contemporary effort is
that of John Mole (2003) who has studied work culture across the board in European
countries, and uses an analogy to the wild west to identify whether cultures belong to a
organic/mechanistic view of organisation (ad hoc rules and regulations vs. clearly articulated
ones) and an individualist/collectivist divide. This is extremely similar, once again, to the
group/grid understanding of culture, and therefore, a very useful starting point for this piece of
research; unfortunately with the exception of Slovenia, none of the other republics of former
Yugoslavia were part of Mole’s sample, presumably due to methodological difficulties in a
(former) war zone. The scores for Greece reflect Hofstede’s research even thirty years later,
with an ad hoc system of rules and an emphasis on collectivity, which under Mole’s
classification makes the country an ‘outlaw’ along with others in the region such as Bulgaria
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
and Romania. The implication of the term ‘outlaw’ from a management perspective is rather
obvious.
Feichtinger and Fink (1998) have produced an interesting theory of collective culture shock in
Eastern European countries, generally typified by lack of orientation, uneasiness and anxiety
(which can be predictors of high uncertainty avoidance) and of lack of trust towards both the
West and the public sphere and politics. Compounding the ‘missing yardsticks’ (1998, p.305),
as they are coined, are bouts of apathy and the inability to take decisions, which then become
manifested in defensive mechanisms and the tendency to reject change. The authors predict
that new cultural forms will only begin being accepted after 2010, and their sample is formed
by countries already in the European Union; it may not be an error to assume that, culturally,
contemporary Serbia is still in the ‘disorientation’ phase, and that will be one of the tasks to be
accomplished in this paper.
A comparative study of perceptions in the Balkans of service in the banking sector by Glaveli
et al. (2006) is a useful recent piece of research involving Greece and Serbia from which
elements of cultural practice can be drawn. Greek bank customers appear significantly more
satisfied with their overall banking experience, including feelings of security, precision,
responsibility and good management, compared to their Serbian counterparts.
Research on excellence within Greek business by Vouzas and Gotsamani (2005) notes the
technical successes of quality techniques, but the noted lagging behind in terms of personnel
and leadership issues. Cultural shifts to a quality management approach are found wanting as
‘human resources issues were not at the centre of quality strategy formulation’ (2005, p.264).
Finally, Zabkar and Brencic (2005) have researched the business environment in Serbia and
have found it to be more characterised by feelings of interdependence and belonging into
groups. Comparing Serbian to Croatian culture, they find that ‘the Serbian culture is more
cooperative, emphasizes the experience of living, and is more concerned with getting along
with others’. (2005, p.210). The implication here is generally positive cooperation and the
development of trust relationships in organisations. Sevic notes the expectation of bureaucratic
cultures being replaced by entrepreneurial ones (2005), which also positively impacts on trust
as a way of escaping the culture of blame that has been preponderant in the last decades.
Greece and Serbia : cultural similarities and differences
Greece and the Republic of Serbia have been chosen for this research as they represent
opposite poles within a similar region. Both countries have a legacy of an Ottoman past and a
culture, based on Hofstede’s dimensions of high collectivism and high power distance, which
presumably have an influence at all areas of employment including issues of safety. Both
countries are of a conservative Christian Orthodox tradition while neither have been associated
with heavy manufacturing, but have been traditionally agrarian societies which have recently
been challenged by making the leap to a service society. Additionally, the culture shock idea
that has been developed for Eastern Europe could find some grounding for Greece despite its
lack of a communist past: the sudden liberalization of the market starting in the early ‘90s
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
coincides ironically with the fall of communism. Until then, Greece was very much a state
leaning on patronage, tight-knit systems and monopolistic, state-protected enterprises.
Despite these similarities, the countries do demonstrate significant differences: Greece has
been independent since 1828 while the independent Republic of Serbia has barely a two-year
history, and that has been plagued with ethnic strife in the past twenty years, continuous
changes of regimes and territorial base, which is not the case in homogeneous Greece, at least
in the period following the Second World War. Furthermore, Greece is seen as a leader in the
South-East Europe region, and stands 24th in the UN’s Human Development Index (HDI) ,
while the Republic of Serbia is economically and socially one of Europe’s least developed
countries, and as a result of its past regimes, has never even been included in the HDI. It can
be argued that if it were, it would not surpass the neighbouring Republic of Macedonia which
stands at 65th out of 177 nations considered (United Nations, 2006). Additionally, Greece is
ethnically rather homogeneous, with few minorities in northern areas, and nowadays a
significant ‘importer’ of labour from other (interestingly not Serbia) Eastern European or
Asian countries. Serbia, on the other hand, is ethnically more heterogeneous even not
including Kosovo, with significant minorities of Hungarians, Romanians, Slovak and
‘Muslims’ who are of Turkic or Albanian ethnicity; due to its economic condition, on the other
hand, it cannot be yet considered a significant importer of labour.
The problems that these countries face are in similar sectors but of a different nature. Serbia,
emerging from Yugoslavia, was once part of the world’s ‘largest experiment in empowerment
and workplace democracy…every Yugoslav citizen…would have director-level voice in [his]
company’ (Lynn et al, 2002), though the failure of the system is partially explained as a ‘lack
of fit’ between the prevalent culture of collectivism and the efforts to empower the less
educated who were not able to adequately accept this. Serbia today has immense social
problems in a number of sectors including health, education and construction (LazarovicPetrovic, 2005). ‘Wild building’ is a wide-spread process whereby certificates for building are
illegally provided by underpaid state employees. Below standard educational institutions are a
consequence of ill-paid staff and inadequate facilities. There are also continuous issues of
corruption in basic medical intervention. Loans from Europe are largely conditional and do not
always assist in the pushing of privatisation efforts. Greece demonstrates problems in the same
sectors but not nearly to the same extent; the construction industry is far better regulated and
legislation on the whole is in line with European law, though not in every instance. A notable
deviation is the refusal of the government to recognize private universities. In both countries,
education can be said to institute partial, rather than systems, approaches, which is particularly
negative for safety issues, notably emergency management (Nikolic et al, 2007).
A comparison of cultures, therefore, will demonstrate the extent to which these countries are
or are not compatible culturally, and also permit the development of possible future research
across further European cultures. People’s perception of risk and the subsequent development
of safety culture are also useful study areas; if the ideal of isomorphic learning is not to be
forgotten, then certainly spreading knowledge based on the experience of other cultures and
environments is the way for European policy-making to break the walls that separate it into
clusters and come through with integrated solutions for the issue of safety.
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3. Brief Review of Methodology
Based on the literature above, the main hypothesis will be developed which shall be tested
through the questionnaires and subsequent analysis. Hofstede and Mole both found Greece to
be largely collectivist i.e. to be strong group. Similarly, Mole discovered Greece to be organic
i.e. weak grid. Therefore, the hypothesis regarding Greece is that it belongs to the
egalitarianist ‘way of life’ based on the grid/group dimension. The lack of research and the
significant changes in the territory that is now Serbia makes hypothesis development for this
nation more challenging. However, based on the original scores for Yugoslavia by Hofstede,
and the subsequent research by Mole in Bulgaria and Romania which have a similar
(communist) background, once again the hypothesis for Serbia will be that it belongs in the
egalitarian camp. This is especially so if the country is in the state of ‘culture shock’ and in
that sense going through the ‘growing pains’ of lack of trust and self-confidence. Therefore,
the backbone of the hypothesis to be tested is that Greece and Serbia, despite contemporary
differences in political alliances, historical developments and workplace characteristics,
display a similar cultural pattern, which has subsequent ramifications in terms of safety
culture. To this extent, the discussion by Bellaby (1989) of the safety cultures of gypsum
miners, bikers and sliphouse and kiln workers becomes interesting as the same dimensions
were found to be present in them. In his analysis, Bellaby focuses on the role of insults as a
means to ‘test’ new members of the group before they were admitted as part of an ‘us’ versus
‘them’ culture, which is typical of the egalitarian way of life.
Two interlinked, yet distinct, questions regarding sampling must be addressed. On the one
hand, the question of the definition of ‘work environment’ needs to be considered. On the
other hand, the more micro-level issue of the profile of respondents also needs to be resolved.
Concerning the first question, research was conducted in four companies in Greece and four
companies in the Republic of Serbia. These were chosen based on amenability; more
companies were approached, but ultimately four were selected where co-operation of local
respondents could be ensured. The companies chosen cannot be named due to reasons of
confidentiality but represent a variety of sectors: a major bank group with operations in both
countries; and a service firm, a manufacturer and a public sector company in each of the
countries studied.
In investigating safety culture, it is essential that both sides of the equation are observed i.e.
both line level employees and managers. Sample size becomes an important issue here.
Probability sample at each location would naturally enhance the chance that the results are
representative of the whole population working in the environment (Bryman, 1989, p.107).
However, it might be impossible to collect a whole sampling frame (Morris, p. 43) and even if
one is given, it may not include part-time employees or those employed on a temporary basis
or those who have just commenced their employment. Therefore, quota sampling may be more
appropriate in each instance, with the important issues being to include responses from people
of all ages, an equal representation of males and females, employees from different
departments i.e. shopfloor/operations, packaging, administration, office staff etc. as well as
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employees with different amount of work experience, ranging from a few weeks to many
years. Likewise in terms of managers, care must be taken to ensure there are a number of
managers surveyed for each organization, though it can be perhaps assumed that in terms of
demographic profile, these will be predominantly male given the preponderance of male
managers in this part of Europe.
Secondary data was used where possible to investigate existing practices within working
environments. Where possible, documentation and manuals on safety practices, transcripts of
existing incidents or disasters and other company materials were studied in detail. The issues
of credibility, representativeness and meaning, as highlighted by MacDonald (2005) become
relevant here, especially as distortion of secondary data is not uncommon in a region not
unknown for its less than enviable law abiding. In general, all environments studied had
documented safety processes relevant to their operation and communicated to all staff (at least
theoretically).
As far as primary data collection is concerned, questionnaires were used for both managerial
and line staff, as it was deemed more appropriate to run the same semi-structured
questionnaire for all categories of employees. The quantitative data collected was analysed
and then also in clusters depending on company activity, on country (Greece or Republic of
Serbia) and by certain demographic variables such as age or years of experience.
A note of caution is due. Perhaps the biggest problem of this piece of research revolves around
the sensitive issue of safety and risk in general, especially in highly risk-averse cultures such
as Greece. This is compounded with the existing suspicion toward the researcher no matter
what the topic would be. Given the content of research, managers were especially reluctant to
discuss lapses in past safety and were expected to praise existing safety measures which would
probably be portrayed as more than adequate. Similarly workers did their best to conceal any
past problems which could reflect badly on them or reveal them to be unwilling, uncommitted
or sloppy workers. It is unethical for the researcher to not divulge the true purpose of research
though at the same time, there is no reason to be specific about the existence of the theoretical
intricacies which will in any case be incomprehensible to most respondents. Therefore, a basic
explanation of the ‘concern for safety’ along with very careful wording of the questionnaires
should somewhat alleviate this issue. A letter explaining the general reason for this project
was composed and attached to all questionnaires. A related problem here was gaining access
to company documentation which was frequently considered confidential and, even if not so,
was often not accessible due to misunderstandings over who exactly is authorized to grant
access to these. While every effort was made to get reliable safety records, the truth is that to a
certain extent, more is likely to be discovered through informal networks and participant
observation than through secondary research, yet such observation is beyond the scope of this
project.
4. Data Analysis
This section will be both quantitative and qualitative in nature, while retaining a rather
descriptive nature: while certain comments on the results will be made, the following chapter
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will involve a deeper interpretation of the findings, in light of the aforementioned theoretical
perspectives.
The analysis of statistics will involve a statistical scoring of the responses to the first part of
the questionnaire (questions 1 and 2) with an analysis for nationality (i.e. the samples for
Serbia and Greece), nature of company studied, and respondents’ age. Unfortunately in the
Greek sample there was a severe dearth of female respondents, so that analysis by gender
would not be reliable. In order to complete the analysis, the statements in question 1 were
separated according to whether they involved a study of group or grid dimensions. In many
cases, the scores had to be reversed as a result of the fact that a ‘high score’ of 5 in some of the
questions, as expressed, would in fact reveal a low, rather than a high, adherence to group or
grid. For example, agreement with the first section of the first question ‘I am in charge of my
own destiny’, would suggest in fact low adherence to group; similarly, agreement with
statement 13 ‘I like taking risks in my professional life’ would suggest low uncertainty
avoidance in Hofstede’s terms, or, for the purposes of this analysis, lower grid.
5. Analysis by nationality
For the following table, the reader is reminded that a score of 1 implies strong disagreement
with the statement, while 5 implies strong agreement.
Table 1: Mean score per statement by nationality.
Serbia
I am in charge of my own destiny
3,4
My family influenced my choice of job
1,6
Religion has an important effect on my behaviour
2,1
I see myself as someone who follows traditions
2
The media affect my opinions
2,1
I take decisions without asking for advice
2
It is important to respect rules even if I don’t agree with them
2
I dress conservatively
2
I have many friends
4
I accept lifestyles different to mine
4,2
I can openly discuss issues at work with my superiors
3
I like taking risks in my personal life
2,8
I like taking risks in my professional life
2,7
I usually agree with generally accepted opinions
2,3
Greece
3,9
1,9
2,8
3,4
2,8
2,8
3
2,9
3,1
4
3,8
2,9
2,9
3,1
Of particular interest in the above results are the significantly higher scores of the Greek
sample with regard to the importance of religion and the importance of following traditions,
though in neither case can it be claimed that the Greek sample shows an extremely high value
for these issues. Equally interesting are the higher scores of Greece concerning perception of
adherence to rules and agreement with generally accepted opinions. On the other hand,
however, the Greek sample indicates a higher independence in taking decisions without advice
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and the ability to approach superiors in the workplace in the event of a problem. Also worth
noting are the almost identical scores of both samples concerning perception of risk taking
both in personal and professional issues. Both samples perceive themselves on the whole as in
charge of their own destiny and independently minded in regard to career choice; in fact the
scores on these dimensions are considerably higher than expected from ‘collective’ societies.
Nevertheless, the above contradict slightly with the desire to agree with generally accepted
opinions in the Greek sample.
As mentioned beforehand, in order for the group/grid dimensions to be analysed meaningfully,
in certain instances scores were reversed. The total overall scores for the group and grid
dimensions for Serbia and Greece were as follows:
Serbia – mean group score: 2,71
Serbia – mean grid score:2,41
Greece – mean group score: 2,73
Greece – mean grid score: 2,80
This already suggests that both countries present a remarkably similar profile based on the
group/grid dimension, and that in neither sample can a very clear positioning be made on the
basic of the distinction into individualism, egalitarianism, fatalism and hierarchy, possibly due
to the central tendency problem. The Serbian sample leans more clearly toward the
individualist camp (low grid, low group); so does the Greek sample, though the scores here are
more tempered, especially as far as grid is concerned.
Analysis by Age
A large portion of the respondents interviewed were aged between 28 and 40, with a smaller
percentage of younger and older employees. Very few respondents were above 55 years of
age. In order to make for a meaningful analysis, respondents will be categorised as younger
(up to 34) or older (35 and above) for the purpose of this cross-section. It would be
particularly interesting to run a special study with respondents of older age groups (55 and
above) which could reveal potential deviations in so-called ‘older generations’.
Table 2: Mean score per country by respondent age
Serbia
Greece
Younger respondents – Group
2,71
2,81
Older respondents – Group
2,71
2,69
Younger respondents – Grid
2,66
2,71
Older respondents – Grid
2,17
2,86
There appears to be little variation by age between the two countries, and in the Greek sample
the scores are uniform throughout all the categories. An interestingly low score appears for
grid for Serbian older respondents; this is especially perplexing given the communist past of
the country where rules and regulations are held as having had a very broad effect on
perceptions and behaviour. However, in studying the specific questions in this section, the
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
score for ‘Religion has an important effect on my behaviour’ is particularly low at 1,6
(compared to the Greek sample, whose mean score is 3). The lack of religious fervour during
communism may partially account for this deviation in the grid results for the older Serbian
sample, though it doesn’t account for the equally low mean score of 1.8 to the question ‘It is
important to respect rules even if I don’t agree with them’ (which has a mean score of 2.4 for
younger Serbians and an impressive 4.0 for younger Greeks).
Analysis by household membership
This is only possible for the Greek sample, given that there were no respondents in the Serbian
sample living alone. This can be explained by the socio-economic nature of the society; those
financially secure enough to live alone are very few, and even then the mores of society are
such that they stay with their antecedent families until marriage; people coming to work in the
capital from the countryside often share houses to lower costs. This is not the case in Greece,
at least given the sample studied, where in fact the majority was composed of single
households, which in itself leads to interesting, if rather alarming, demographic conclusions.
The grid-group analysis for the Greek sample based on living alone or not is again rather
uniform:
Table 3: Mean score by composition in Greek households
Greek scores
Single Household – Group
2,6
Multi-Person Household – Group
3
Single Household – Grid
2,9
Multi-Person Household – Grid
2,6
A large deviation here is in the reversed score of the question ‘I take decisions without asking
for advice’ where those of single households score 2.6 compared to 4.0 of those living with
others – this being a reversed score, it implies that those living with someone will be
influenced much more in decisions by ‘group’ (i.e. other household members). Similarly, the
reversed score of the question ‘I like taking risks in my personal life’ indicates that people
living alone score 2.6 compared to 4 – again, those living with others appear less likely to be
willing to add unnecessary risk in what may already be a ‘secure’ household environment.
Analysis by years of work experience
Table 4: Mean score per country by years of work experience
Serbia
Greece
0-3 years - Group
2,80
2,79
3-9 years - Group
2,60
2,67
10 years + - Group
2,64
2,8
0-3 years - Grid
2,69
2,79
3-9 years - Grid
2,0
2,76
10 years + - Grid
2,36
2,9
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Once again, scores here are largely compatible and no particular relationship between years of
work experience and perception can be discerned. Interestingly, the grid score for respondents
with average years of work experience in Serbia is lower, especially in relation to the question
‘It is important to respect rules even if I don’t agree with them’ which has the lowest score in
the whole study of only 1,2. This may partially be explained by the fact that these respondents
entered employment during very difficult times of transition, and they see themselves as forces
of change who are to change rules rather than accept the status quo which they would rather
reject.
Analysis by locus of employment
As mentioned previously, the companies studied were grouped as follows: bank (case study in
both samples), service sector, manufacturing sector and public sector. The following table
presents the results on the group/grid dimension for each sample based on employment.
Table 5: Mean score per country by nature of employment
Serbia
Greece
Group: Bank
2,50
2,71
Grid: Bank
2,86
3
Group: Service sector
2,76
2,92
Grid: Service sector
2,29
2,5
Group: Private sector
2,76
2,79
Grid: Private sector
2,39
2,57
Group: Public sector
2,79
2,5
Grid: Public sector
2,21
3,14
Comparing the two countries, it is evident that there are very small variations in all of the
companies’ scores with the exception of the ‘grid’ dimension in the public sector which is
considerably higher for the Greek sample. In other words, the respondents employed in the
Greek public sector feel considerably more constrained by rules than their counterparts in the
Serbian sample.
Within each of the firms studied, it appears that the grid dimension is higher in the bank for
both samples, but in the Serbian sample in this firm there is significantly lower ‘group’ than in
any of the other samples; while also in the Greek sample, group in the bank, as well as the
public sector in general, appears lower than that in the service and public sectors. Overall,
however, the responses reveal a remarkably similar pattern overall.
6. Perceived safety in society and the workplace
Every single respondent in the Serbian sample responded negatively to the statement ‘I believe
society protects me adequately from risks’. This compares with 75% negative responses from
the Greek sample. The implication is, here, that society as a whole (i.e. government and the
institutions that surround the individual) is inadequate in effectively providing one of their
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
elementary tasks – protection of citizens against risk. The responses from the Serbian sample,
given recent developments, were expected; it is the Greek sample that surprises.
Further surprise concerns the statement ‘I believe my company protects me adequately from
work-related risks’. Here 60% of the Serbian respondents were positive. This was especially
the case with the private and manufacturing samples in Serbia. In contrast, 75% of the Greek
sample was negative across the board concerning perceived risk in the workplace.
Qualitative analysis
The true nature of the differences in perception in the two countries studied comes from the
analysis of the comments made by the respondents regarding the risk they are exposed to in
their lives and in the workplace. The Serbian respondents almost uniformly made mention of
the negative, unstable political situation which they perceive as a major risk to their future, as
well as a possible direct threat to their life. Most respondents (about 80%) also made mention
of traffic and bad driving, and in a few instances this was also indicated as the greatest threat
the respondents have been exposed to, if they had been involved in a vehicle accident in recent
years. Further risks in life mentioned by the Serbian sample were the fear of poverty and
general financial insecurity and a number of female respondents also mentioned rape as a
preponderant risk. The Greek sample, on the other hand, seemed to have little commonality in
its views on perceived risk. Only traffic issues and bad driving can be singled out as a
common theme to these respondents, whose overall perceptions to risk seem to be bound to
specific personal situations which differ from one individual to another.
Regarding risks at work, a similar portrait of the two countries emerges, with the Serbian
sample far more ‘uniform’ in its responses. A common thread was the bad condition of
buildings which is perceived as a threat to safety overall and health in particular. Lack of
heating, bad plumbing and the absence of appropriate installations were mentioned by a
majority of respondents. A further interesting theme was the fear of theft in the workplace
either by co-workers or as a result of unauthorised entry by third parties at the work place.
Further sources of psychological or emotional risk were frequently addressed in the form of
insincerity or lying at the workplace, bad overall relationships with superiors, peers or
subordinates, stress as a result of too much ‘chaos’ and disorganisation at work and the
frequency of verbal arguments. The Greek sample once again presented little uniformity in its
responses, with a whole spectrum of issues addressed such as working at heights, possibility of
data loss, cold weather, responsibility for large amounts of money or even electrocution. On
more than one occasion, the risk of unemployment was pertinent. Interestingly, this was
mentioned only once in the Serbian sample.
The Serbian respondents also appeared proactive in the remedying of the problems
encountered, with a number of solutions forming a common element to many of the
questionnaires. Nearly all made mention of ‘economic development’ in one form or another,
though few became more specific as to what they mean by this; those who did mentioned
more investing in infrastructure, especially medical and transport-related. Educational reforms
at university level were frequently suggested as a means of alleviating fears and of improving
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
the quality of the workforce. Ongoing education of the workforce was also singled out as
necessary, and lacking, especially in regards to risk. The need to control criminality, reduce
corruption, create new laws and increase security in public places as well as the workplace
itself were also mentioned more than fleetingly. One respondent openly remarked on the need
to ‘cleanse’ the police force and enforce strict internal controls within the army and the police.
Another interesting theme was the desire for psychological support of workers by establishing
advice centres and by determining individual responsibilities at work more efficiently.
Therefore, the theme of ‘communication’ emerged quite frequently; training in good
communication was seen as a way to counter psychological risk and improve overall
camaraderie at work. Some of the responses which were closer to the theme of risk
management noted the absence of any serious risk management efforts and the overall
ignorance of staff as to the risks which they are exposed to; better management and a better
risk framework were perceived as means to promote improved safety at work.
The Greek sample, on the other hand, made little mention of criminality or corruption; instead
the need to protect consumers in the face of increasing prices and looming loss of financial
power was here a common idea. Mention was also made of the need to respect existing
legislation. This suggests that while in Serbia the need for institutionalisation of legislation in
the first place becomes an issue, in Greece it is a case of implementation of what is perceived
as an adequate, but not well executed, framework. The Greek sample on a number of
occasions underlined the need for more safety on the roads through heavier fines and the
development of better pavements. In a significant number of responses, the questions
regarding possible solutions to risks were not completed by the Greek respondents, which is
itself worthy of interpretation. One response, translated verbatim was ‘Unfortunately Greek
society is and will remain rubbish – nothing can be done’. Little mention was made of
communication issues or the need to solidify institutions, which was the case with the Serbian
sample.
Rather understandably perhaps, more than 90% of the Serbian respondents noted the 1999
NATO bombing as the greatest risk they have been exposed to in the past ten years. Given that
this was a unique occasion, bombing was not noted by anybody as a perceived future threat,
indicating that Serbian respondents feel they are no longer exposed to an external political
threat of this sort. This is interesting given the volatile nature of the Kosovo situation, and will
be commented on further. The Greek sample once again displayed no uniformity regarding the
issue of greatest risk exposed to: among the ones mentioned, possibility of air crash in bad
weather, earthquakes, having children, riding a motorcycle, near death of close family member
are indicative of the personal nature of risk to the average Greek respondent.
7. Data Interpretation
In this section, the data analysed in the section above will be placed within a context both with
regard to previous research discussed in the literature review, and with the aim of referring to
the research objectives of this project.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Greece and Serbia and ways of life
The first objective was to place Greece and Serbia along the group/grid dimension based on
the responses obtained. Given the scores obtained, it is suggested that the countries exhibit a
similar pattern, with weaker than average group and grid in both cases, though the grid score
was considerably lower in Serbia. Both countries therefore belong to the individualist ‘way of
life’ where people are seen as linked in a ‘competitive network’ frame (Frosdick, 1995). This
suggests lower than average belonging to groups and being constrained by them on the one
hand, and a lower than average respect of, and binding by, established rules or institutions
such as religion and law. This leads us to reject our null hypothesis of belonging to the
egalitarian camp.
Further analysis of the data does little to uncover particular variations in attitudes, though it is
worth noting that in the public sector in Greece the scores for grid are slightly higher to the
extent that they can even be considered as ‘high grid’. Additionally, analysis for household
composition suggests that in Greece, the group dimension is also considerably higher in
households of more than one person.
Having established the countries’ position on the axes, the more challenging task is to interpret
these scores given the situation of the loci studied today. The scores go against the analysis
made by Hofstede, which suggested a ‘collective’ mentality i.e. large participation in groups
and a large influence of groups on behaviour as well as a high degree of uncertainty avoidance
for both Greece and Serbia i.e. a great propensity to not tolerate the unknown and to follow
established ‘norms’ and known paths of behaviour in order to avoid (emotional) risk and
uncertainty. Despite the methodological limitations of this research, it is still suggested that
the responses obtained are valid and reliable, at least for the respondents studied. The lack of
respondents of older age groups and the central-tendency factors may to some extent affect the
data, but still explanations need to be discovered elsewhere.
Both the research by Feichtinger and Fink and by Smallman and Weir may suggest reasons
why Hofstede (and Mole) are not justified by the data in this study. On the one hand, the
‘transition’ shock of countries in the south-eastern European region may well result in new
forms of behaviour, especially to the extent that people reject old, accepted forms of cohesion.
Due to the transition they are experiencing, new forms have yet to be discovered and accepted
fully, leaving people in a void where they feel they don’t belong, and that they need to apply
basic ‘survival’ principles in order to practically and psychologically withstand the tension of
social change. Smallman and Weir interestingly suggest that in times of crisis all behaviours
tend to be transformed toward the individualistic sphere for survival to be ensured. According
to the authors, this is also the best strategy for survival, as it ensures free flows which are
flexible in the light of change.
Qualitative comments from this study further enhance the idea that, in a sense, respondents in
both countries are ‘in crisis’ and, therefore, their perception of themselves has shifted to
ensure their own survival. The Serbian sample consistently made mention of the need for
communication, advice centres, information. They are demanding what has been coined
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
‘socio-emotional’ leadership, which is especially true in disasters and crisis situations;
leadership that is conscious of feelings and addresses these (Scarman Centre, 2006d, pp.4-42).
Their uniform condemnation of ‘society’ which is considered inadequate in offering protection
against risks may further support the shift to individualism as means to survival. The Greek
samples’ individualistic responses, which have been difficult to categorise because they are so
respondent-specific, are a further indication of the breakdown of larger community
understanding. The lack of mention of issues such as ecology, pollution, lack of open spaces
or unattractive, even illegal, urban planning which clearly is a significant issue in Serbia at
least (Petrovic-Lazarevic, 2005), suggests that most respondents do not have a clearly
developed collective conscience; most desired ‘solutions’ to risk situations are either
formulated generally or in such a way that specific positive outcomes for the respondent can
be immediately clear and understood.
Two comments regarding the above are essential. On the one hand, if we are to accept that
these societies as a whole are in ‘crisis’, then it may well be the case that once situations are
normalised, the shift to individualism will give way to ‘older’ ways of life such as the
hierarchical structure that was to be expected according to Hofstede’s data. On the other hand,
there are many examples of the development of ‘expanding’ or ‘emergent’ organisations, in
Webb’s terminology, in both Serbia and Greece. The development of mass resistance to the
1999 bombing in Belgrade or the vast protests protesting the rigged elections of 2000 in Serbia
and the mass of volunteers helping with the fire crisis of 2007 in Greece are indicators that
within a clear and acute crisis, when ‘grid’ is not functioning at even basic levels, ‘group’ and
the feeling of belonging to a greater society is ever present. This is somewhat ironic indeed.
Safety culture in Greece and Serbia
According to the theory, the individualist sees risk as an opportunity, as a random event that
may or may not occur, but which should not be factored into one’s equation, as it cannot be
predicted or controlled. The bigger question here in relation to the countries studied, is what
such a profile implies for the development of an appropriate safety culture by the government.
Socio-cultural distinctions notwithstanding, it could be argued that the role of a democratic
government as far as risk management is concerned is to protect the basic rights of its citizens
as well as promote their welfare and safety from risks, whether within or beyond the control of
the individual. Stated otherwise, the aspects of governmental aims can be summarized as risk
assessment and management, business (and societal) continuity and civil protection (Scarman
Centre, 2006b, pp.8-6), all of which can be seen through the prism of safety culture. For the
former aim, it is essential that hazard constructions are adequate (Scarman Centre, 2006e,
pp.5-10), for the second and third that subsequent legislation is developed which can
realistically be applied in every contingency. It is clear that from the respondents’ point of
view, the government is not adequate in either of the three, but perhaps the most problematic
one is in fact risk assessment and management from the individualist perspective. The reason
for the failure in developing safety cultures may well be that too much of an effort has been
made by governments to rationalize, and therefore, ‘protect’ through a system of rules and
bureaucratic regulations (post-communist in Serbia, patronage and the state as the overarching
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
leader in Greece), whereas in fact the tendency of the people has been toward more ‘open’,
‘opportunistic’ systems of governance and, as an antecedent to this, culture.
In some ways this can be reformulated as the theoretical dichotomy between rationalists and
generative perspectives. While rationalists aim to recognize, analyse, formulate and implement
– which may well be claimed to have been the backbone of governmental practice thusfar –
the generative perspective challenges ‘the notion that there is an objective reality out there,
which strategists should try to discover’ (Scarman Centre, 2006a, pp.7-12); instead it seeks to
promote lateral thinking which makes sense of the world, reflects, envisions and ultimately
acts (Scarman Centre, 2006a, pp.7-15). If, according to this theoretical strand, strategy is art,
therefore, imperfect, the generative perspective may well reject any claim to overarching
governmental plans being anything more than blueprints which allow for multiple ‘artistic’
interventions at all levels depending on specific contingencies; for example, Rosenthal has
been very critical of the concentration of rules in the Netherlands (Scarman Centre, 2006e,
pp.6-27). Safety culture in Greece and Serbia may, therefore, well be nonexistent partially as a
result of this dichotomy. While governments have been rationalists, general perceptions
challenge this; the subsequent void implies that legislation stalls, rules are followed
technically but not in practice, and the subsequent result is inability to create successful safety
frameworks on the one hand and dissatisfaction from ‘end users’ on the other, who feel they
are not adequately protected partially because the foundation of this protection is based on
antiquated, no longer valid, cultural perceptions of what is acceptable.
However, the general suggestion by Serbian respondents that they feel adequately protected by
their firms (especially the ones employing fewer people) points to the seeds of appropriate
development of safety culture within the workplace, if not in society as a whole. This does not
mean to suggest that feeling protected also implies a positive safety culture; but it does suggest
that feeling protected is the first, essential step, for the creation of an appropriate
understanding of safety. It is relevant here to bring into the discussion the control/mobilization
divide (Scarman Centre, 2006e, pp.6-7) as a key aspect of culture. This can be taken back to
the role of the organization/government in protecting its citizens: should it do so by telling
them what to do, giving them guidelines as to what it could do or allowing for more freedom
in its reactions? This parallels an old debate in management thinking from the ‘old style’
authoritative style to the ‘newer’ style of participative leadership which encourages the
development of ‘leaders’ at all levels of the organization or community.
In a truly collectivist society where individual responsibility is eschewed in favour of multiple
layers of hierarchies before decision-making is attempted, it may be seen that responses to
crises will perhaps fail as they take longer than they should. Indeed, following the earthquake
at the Japanese town of Kobe, for example, there was local reluctance to seek help in order to
‘save face’ or even to believe in media reports before acting (Bawtree, 1995, p.10); the
hierarchical rather than horizontal systems that are a result of high uncertainty avoidance also
resulted in emergency services (fire, police and defense) initially acting independently, only
cooperating more effectively later on in the response effort; further poor horizontal
communication was demonstrated in the bad communication among different levels of
government (municipality and prefecture). It appears that the Japanese focus on uncertainty
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avoidance and ‘vertification’ failed to create the sense of urgency which would have yielded a
better emergency response. In fact, ‘a remarkable aspect of the Kobe aftermath is the scale of
community self-help with residents helping to run their temporary accommodation’ (Scarman
Centre 2006e, pp.6-23). It appears that culture may in fact be flexible to the demands of
emergencies and itself create opportunities for mobilization rather than control as needed at
the local level. This was evidenced in the countries studied during the biggest crises of the past
years; emergent volunteer efforts to extinguish fires or provide post-disaster relief to those
affected in Greece for example point to a ‘group’ feeling that is quite removed from the results
of this paper. Therefore, it seems reasonable that ‘the generic model should include planning
that aims for social mobilization rather than social control’ (Scarman Centre, 2006e, pp.6-29)
which suggests quite a broad scope for organizational arrangements which are rather different
to the ones adhered to so far; even more so, when data suggests that cultural shifts have taken
place which perhaps nobody has been aware of.
8. Recommendations and Conclusions
Frosdick (1995) gives an account of what the organization of a football stadium would imply
for the individualist. Spectators would be allowed to sit where they like with little segregation.
There will be little formality in dressing and the ratio of stewards to spectators will be low.
There will be little continuity in personnel and when things go wrong, the perception of blame
will be on someone external i.e. an ‘us’ vs. ‘them’ culture. Blaming will be overt.
It is apparent that a positive safety culture needs to address this issue of blame, as well as the
consideration of ‘external enemies’ which are always seen as responsible for problems. In fact,
most of the respondents quite overtly blame others for their own misfortunes and problems,
which is to be expected from the individualist. However, if ‘cultural relativism’ is to be
applied, the true challenge is to develop a positive safety culture within the individualist camp,
rather than ‘change’ orientation to suit the demands of the safety manager. This is in no way
simple, even in countries where governments have given a high priority to safety and
emergency planning in general. The UK approach, for example, has been criticised as too
centralized and not holistic enough (O’Brien and Read, 2005). To create such a holistic system
would be extremely costly, as it would have to take into account all possible scenarios and
perceptions (Scarman Centre, 2006e, pp.9-5). Clearly, there will be no panaceas or perfect
systems.
If the thesis by Smallman and Weir is to be accepted, then the countries’ placing as
individualists already indicated a considerably agility in dealing with crisis situations, rather
than a tendency to be paralysed by them as was, for example, the case following the Kobe
earthquake. Such agility may well be the result of unconscious ‘training’, either in resilience
as far as the Serbian population is concerned or due to the frequency of natural disasters such
as earthquakes and fires as well as road accidents which have been singled out by the Greek
experience. The emphasis here is on the development of a group understanding and pattern of
behaviour that may well be more challenging in societies with low group and low grid. Further
comment will be made on the issue of mutual trust singled out by this definition.
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As far as organizations, and even governments as a whole, are concerned, the framework
proposed by Ansari and Modarress (1997) based on the experience at the Boeing corporation
is an effective springboard to developing a positive safety culture and greater (group)
perceptions of safety, providing that this framework is adapted to the individualistic nature of
the societies studied in this paper. The researchers suggest a five-point long-term plan in order
to bolster safety and, thereby, shift cultures away from ineptitude regarding safety. Their
framework involves five elements:
•
•
•
•
•
Executive leadership, which involves listening to people’s concerns, establishing a
top-level steering committee, publicizing the effort and adopting new frameworks
concerning safety accountability.
Safety improvement processes, necessitating an abandoning of traditional safety
procedures in favour of a behavioural safety model based on direct focus on action,
behaviour and performance; managerial accountability; empowerment rather than
power concentration at the top.
Across-the-board value-added training; which are the result of a study of how people
truly learn, and which also incorporate an evaluation component.
Alternative work programme/return to work for those previously injured to make a
successful comeback to the workplace.
Communication through newsletters, production of films and the focus of safety issues
at meetings.
Such ‘textbook’ approaches to safety issues do, to a certain extent, obscure the extent of the
problems and turn a blind eye to issues of cost which are paramount in safety discussion,
especially as cultural change is a long-term process whose results are frequently unclear at
early stages. A further problem is to what extent such a safety plan should or could be
implemented at the state, government level, where it may most be necessary in terms of
Greece and Serbia. In fact, especially with regards to Serbia, the majority expressed
satisfaction with safety in the workplace, though whether perceived satisfaction also implies
an optimal, effective safety approach is a further complicating point.
Nevertheless, the framework proposed, if appropriately used, could be well received by
respondents within an individualistic cultural framework. Communication was especially
mentioned by Serbian respondents as a problem area where they perceived a lot of
improvement was needed to reduce psychological risk which, predictably, affected their entire
work experience. Most efforts to create cultural change have failed because of inappropriate
studies of behaviour and underlying perceptions of employees (Cooper and Phillips, 1997).
The deficit model of communication, with its emphasis on scientific rationality which gives no
value to lay knowledge (Scarman Centre, 2006b, pp.3-7) may be at the root of many evils
regarding safety measures in the loci studied. By perpetuating authoritarian and authoritative
remarks, such risk communication only serves to perpetuate old bureaucratic systems clearly
at odds with the individualistic leanings of the respondents. Similarly, this further justifies a
narrow participationist approach, where all debate on safety outside those qualified is seen as
opening the debate to ill-informed actors (Hood et al, 1992). A social learning approach using
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reflexivity (Scarman Centre, 2006b, pp.3-28) may be a helpful way to minimize conflict and
enhance understanding avoiding the danger of treating humans as analogous to physical
objects (Hood et al, 1992). It is in this that the development of leaders becomes essential.
The development of leaders, however, is a thornier point in societies which are relatively high
on corruption levels and are known for nepotism and the eschewing of meritocracy; this is
perhaps particularly so at the government level with politicians uniformly labelled inept and
with no social conscience. Yet, as noted by Sevic (2005), there is hope in Serbia for the
development of entrepreneurial leaders that are capable of analyzing needs, are capable of
taking risks and a problem solvers rather than rule followers (Williams, 2008). It is the
development of true leadership that is probably the greatest challenge for both loci studied.
Even if technical excellence can often be observed, as noted by Vouzas and Gotsamani (2005),
the human aspects of the equation are generally lagging behind. This may be partially also
caused by individualist tendencies, as low adherence to rules and a lower feeling of
community belonging are less likely to give rise to good communally responsible leaders. On
the one hand, such leadership would border on ‘corporatism’, the desire to accumulate as
many social constructions as possible (Scarman Centre, 2006e) in order to ensure both
maximum expertise and maximum ownership of solutions. On the other hand, the role of
empathy is primary; good leadership, especially in times of crisis, is associated with
significant empathy, as in the case of the Mayor of Amsterdam following the crash of an
aircraft into a tower-block; the Mayor ‘always gave priority to empathy’ (Scarman Centre,
2006d, pp.4-42) and his leadership has been held as an example of successful handling of a
difficult event. Issues of emotional and social intelligence, as developed by Goleman, also
become relevant here. A good question to pose, to which no answer will be attempted here, is
to what extent can true emotional or social intelligence develop when people reject rules and
the influence of their groups. Can they really display organizational awareness, teamwork and
conflict management skills that are necessary for good leadership?
The low group rankings may be helpful in assisting the development of true accountability
systems and empowerment. Following the aftershocks of the transition stage as mentioned by
Feichtinger and Fink during which there appears little institutional support to shift leadership
styles (Petrovic-Lazarevic, 2005), there is a belief that imported Western leadership styles will
gradually improve, especially with regard to accountability issues. If the new wave of
individualism is indeed accurate, then Hofstede’s scores of high uncertainty avoidance may
well have subsided, allowing for the development of a culture where individual accountability
is accepted rather than viewed with trepidation by employees and citizens as a whole. The
danger here for Serbia is that empowerment will follow on the lines of the old Yugoslav selfmanagement systems which failed as they provided participation in structure but not in
processes, culture or the broader environment. (Lynn, 2002). Given the Greek tradition of
technical excellence and little attention to softer issues, this is also a danger there;
empowerment may be instituted on ‘paper’ but not further ‘pushed’ into the organizational
system by unsupportive managers who are not operating within a leadership framework.
Individualist leanings may also assist in the correct administration of training programmes that
emphasize individual learning styles and retention rather than older mass-training styles which
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have a technical focus rather than an emphasis on cultural change. More attention needs to be
given to education as a whole and the continuing education of the workforce, as noted by
some Serbian respondents. In fact, education as a whole has been relegated to a political
process in both countries; in Greece the long-term refusal to acknowledge private universities
and in Serbia the old-fashioned theoretically-based system with little practical applications
both perpetuate cultures more appropriate for ‘hierarchs’ rather than individualists. It is not
surprising then, that in both countries educational systems are viewed as big political failures
and yet if these systems that carry with them a culture incapable of instilling or creating an
appropriate safety culture.
A final point to be made is concerning the issue of trust, which was interestingly found to be
so essential to Serbian businesses by Zabkar and Brencic. Respondents in both countries show
a remarkable lack of trust in their leadership, in the legal frameworks they are subject to and in
their social organization. Greek respondents on the whole further show lack of trust in the
workplace, with 40% of Serbian respondents concurring. It may well be the lack of trust that
has led to increase in individualism rather than the other way round. Distrust is at its highest
following failures in the handling of the disasters, and it takes time, the emergence of good
will, and continuing communication of genuine incorporation of local interests to overcome
distrust (Browning and Shelter, 1992) after disasters. And yet, for positive safety cultures to
develop, trust is perhaps the biggest key. Tyler (2003) makes mention of social trust, which is
based on perceptions of the motives of others rather than procedural fairness. Believing that
‘authorities’ are acting with the purpose of someone’s welfare in mind, defined as social trust,
is found to hugely correlate with accepting decisions, particularly unpopular ones. Behavioural
integrity i.e. the congruence between espoused and exhibited values is perhaps the most
critical element for trust (Joseph and Winston, 2005). It is here that the biggest problem in the
development of safety cultures emerges: behaviours differ from rhetoric in the loci studied,
and the result is lack of trust. This is the case with leaders of societies (politicians) and
organizations (managers) alike. It is here that most attention needs to be paid, and it is in trust
that issues of leadership, communication, positive motivations and correct learning all find
their common denominator. It must never be forgotten that risk society is polarized and
uncharted (Scarman Centre, 2006f) and, in a sense, there will never be a ‘right’ way of doing
things, merely a ‘better’ or ‘more efficient’ way.
9. Conclusion
This paper has attempted to examine perceptions of risk and place Greece and Serbia within
the group/grid dimension of culture in order to identify ‘ways of life’ in these countries. With
culture itself being a complex, often misused term, divisions into typologies such as that
attempted by ‘ways of life’ are often not fruitful; nevertheless, they are a starting point for
understanding. The literature suggests that both countries should display high group in the
form of adherence to larger groups and high grid in the form of a high tendency to prescribe
and follow rules in order to minimize risk. Following research in four organizations in each
country, the results largely place both Balkan states within the individualist camp of low grid
and low group, thereby contradicting a lot of the comparative literature available on culture,
including Hofstede’s seminal work on organizational culture. Analysis of the data across a
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
variety of indicators such as place of work, household composition or age shows little
variation in the data. The results can be explained on one level as a result of the aftershock of
difficult transitions to true market economies which occurred in both countries despite their
different historical and economic profiles. It is deemed that,in a broad sense, both societies are
in ‘crisis’, with social problems of mistrust that need to be addressed urgently if progress is to
be made in addressing considerable issues in sectors such as education, housing or health. The
consequences of individualism on safety issues are that many of the current frameworks in
place, based on a larger than necessary, ineffective state apparatus, are out of place and need
to be re-examined entirely. The state is considered inadequate in all its major aims as an
institution, while ‘blamism’, typical of individualistic ways of life, is rampant in both
countries. Some evidence from the private sector in Serbia suggests that individual
organisations are already working in the right direction regarding safety issues. Nevertheless,
on a broader societal level, unemployment, political instability and inadequate legislation
concerning behaviour on the road appear to be risks that instill fear and uncertainty in Greek
and especially Serbian respondents. Further research on a larger scale is necessary both within
the countries studied and across the region in order for more useful comparative data to be
uncovered and the exact nature of the shift in paradigms to be explained. A wider scope of
future research should include more detailed analysis of risk and fear and in-depth observation
of organizational safety processes and their perception by employees. It is suggested that there
is scope for good inspirational leadership and student-centered training programmes. In fact,
the individual rankings point to a potentially good reception of such leadership efforts if they
are appropriately applied. Better communication in company and also between the state and
the ‘people’, with the subsequent creation of a trust society, may be the only viable way to
move into the 21st century and finally cast off the negative implication of the term ‘Balkans’.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Cem BERK
Institute of Social Sciences
Marmara University, Turkey
[email protected]
INFRASTRUCTURE AND RECOVERY FROM GLOBAL CRISIS:
EMPLOYMENT, OUTPUT , AND INVESTMENT STRATEGY
Abstract
Infrastructure can have a significant role in reducing the effects of global financial crisis, since
most developed economies underinvested to infrastructure facilities. In addition to the
economic benefits by pepping up the economy in the financial turmoil, it has long been
proven in the literature that the output increase ,labor productivity, and employment have been
positively affected by the increase in public spending. This paper deeply studies these issues
and public policy on infrastructure. Considering infrastructure as a long term investment
would lead to inadequate strategy, so in this paper, infrastructure performance is also included.
The importance of infrastructure sector for the economy is explained in an empirical research
using U.S.A. data for the period between 1792 -2009.
Keywords: Global Crisis, Public Spending, Augmented Dickey Fuller.
1. Infrastructure
Infrastructure is a strategic sector and most countries chose not to report the priority needs and
investment outcomes. The United Kingdom infrastructure spending, according to unpublished
OECD data, was less than similar sized economies such as France and Italy and more
significantly it is also less than much smaller economies Belgium and Sweden. The investment
shortfalls of the UK in transport, urban development and communications are a threat to long
term attraction of the country for new investments. The UK infrastructure investment is less
than depreciation amount. However, due to the privatization of water, sewage, and energy
utilities, private sector is more active in infrastructure in the UK, then European average. Also
rising political and economical pressures to raise extra revenue, limits the funding for low
priority infrastructure investment.
The UK solution to this situation is private finance for public infrastructure investment (PFI).
In order to be beneficial for the economy, the capital investment in national industry for
private sector is required. Government finance can cost much cheaper than private sector
projects, but there are efficiency gains with private sector as well as market capacity increase
for funding of these investments. On the other hand due to transfer of risks, namely design and
construction risk, commissioning and operating risk, demand risk, residual value risk,
technology risk and regulation risk, the private sector investment is more costly. On the other
hand increasing public spending outside of long term economic growth have created problems
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
in 1970s and 1980s due to high interest rates and currency volatility. PFI was introduced in
1992 when the government revenue decreased, and government was unable to allocate public
spending for infrastructure sector, eventually a measure for macroeconomic problems (Clark,
1999, p.346).
Infrastructure has various positive effects for the economy. There are empirical evidences on
indirect effects of infrastructure, such as fall of unemployment, and rise of wages. The direct
effects are always present, applied specifically for the market such as the decrease in transport
costs after a transportation infrastructure investment. In the following table (Table 1), the
effects of transportation infrastructure on trade volumes and an imperfect labor market. The
transportation costs are assumed to decrease 20% by using better roads or modes.
As seen in the table 1 transportation costs decrease the cost of unit good transported and
increase trade volumes. This means that more agricultural and industrial goods are produced,
due to increase in productivity due to less transportation costs and more trade flows. This
results an increase of labor in the rural region and capital in urban region. As a result there is
an increase in total welfare (1389 to 1401) and decrease in unemployment (3.65% to 3.50%)
(Zhu, 2009, p. 68).
Table 1: Trade Volume and Labor
Source: Zhu, 2009, p.68
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
2. Infrastructure and Global Crisis
The solution to world economic crisis should be evaluated on global basis since a country
can’t isolate itself from the rest of the world. Therefore the approach for coordinated
international action is critical. Income inequality is obvious among and within countries. The
US deficit continues to be a threat for the global economy. The announced stimulus packages
should be applied in global coordination.
Investment in infrastructure is the major component of the stimulus plans. Virtually all
countries allocate large sums to infrastructure development. In France € 11.1 billion will be
spent to infrastructure which accounts for the half of the stimulus package. This includes
direct state investment to improve rail and energy infrastructures, postal service, higher
education, research and improvement of state owned properties. Canada, Germany, Poland,
Portugal, UK and US focus on environmentally friendly technologies (Ortiz, 2009, p.3).
It will take time for infrastructure spending to help the economy obtain previous growth
quickly, but it will provide a significant economic boost. As the current downturn is expected
to last for an extended period, the infrastructure investment will be a key solution for the
recovery. Local economy can benefit from the plan, as most of the infrastructure money will
be spent on hiring workers and on materials and equipment produced domestically.
The US recovery plan includes $160 billion infrastructure spending, a $90 billion in traditional
infrastructure (highway construction, public transit and waterways); a $70 billion for a variety
of energy, science and healthcare projects. Every dollar spent on public infrastructure is
expected to boost GDP by $ 1.59. As countries underinvested to infrastructure, the period of
financial volatility is an opportunity for accomplishment long-term growth prospects.
Construction and manufacturing benefit most from the infrastructure spending included in the
stimulus plan (Zandi, 2009, p.11).
Construction and manufacturing will experience strong job growths under packages that
includes infrastructure, energy, and school repair. Due to tax cuts and other precautions all
sectors are effected positively with more U.S. job creation as given in the below table (Table
2). The spending on infrastructure, schools, and energy investments will create jobs
specifically on construction sectors, whereas other sectors would indirectly benefit (Romer,
2009, p.6).
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Table 2: The Effects of Recovery Package on Employment
Component
Total Effect
Direct Effect
Indirect Effect
Energy
459,000
305,000
153,000
Infrastructure
377,000
236,000
142,000
Health Care
244,000
166,000
78,000
Education
250,000
166,000
83,000
Protecting Vulnerable
549,000
140,000
409,000
State Relief
821,000
442,000
379,000
Making Work Pay
505,000
0
505,000
470,000
0
470,000
3,675,000
1,455,000
2,219,000
Tax Cut
Business Tax
Incentives
All Components
Source: Romer, 2009, p.6
3. Output Effects
Private companies use public facilities to some extent and increasing levels of production
leads to lower returns under public services overcrowding. Therefore public spending is a
crucial factor for production in the economy. For the sake of the model the government uses
only tax revenue to allocate public spending between regions. The public spending is under
blockage meaning as one firm increases its use of public resources , the other firms will make
less use of it. When a firm increases its size, the marginal product of the last unit of capital
decreases. So in the micro level, the production of a firm is a function of private capital of the
firm and productive public services. Figur e 1 shows a non linear modeling of the system in
consumption-capital plane. Above the K=0 line , the stock of agregate capital decreases, while
below capital increases. On the left of the C=0 line consumption increases, and on the right it
increases. The two trajectories overlap for values Ka and Kb. For K< Ka, there will be corner
allocation, a poverty trap. Marginal product of capital is not sufficient for more market entry
due to congestion of public spending. Between Ka and Kb , the economy may move to either
corner allocation or balanced growth path. Under these conditions, expectations would
determine which way the economy moves. For K >Kb , the economy moves directly to
balanced growth path , and the economy grows forever since the capital allows further entries.
Corner allocation and balanced growth path. The model shows that public spending
determines the performance of the economy (Acconcia, 2000, p.227).
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Figure 1: The interior stationary equilibrium is excluded
as a possible long-run outcome because it is locally unstable
Source: Acconcia, 2000, p.227
Previous literature has repeatedly shown that public capital affects real private output in the
economy. When modeling the real output as a dependent variable, it is seen that the output per
worker changes with the stage in business cycle. The considered variables are U.S. real gross
domestic product in billions of 1982 dollars(Q), privte domestic labour index(L), private
domestic real capital input(K) in billions of 1982 dollars,real stock of equipment and
structures(G), output as percentage of capacity in manufacturing. (GAP) The data is tested for
non-stationary , which means spurious regressions exist. In other words there are casual
relations whereas in fact there is no relation. So the data is tested for unit square root,
Augmented Dicky Fuller methodology. Accordingly, the data is integrated to the level 1. On
the other hand Johansen’s cointegration test is applied , where null hypothesis can not be
rejected. According to ordinary least square result in the first difference, (Table 3) the
coefficient of public capital infrastructure variable is positive and significantly different from
zero. This is an indicator that public sector investment increases the private sector real output
(Delorme, 1999, p.568).
Table 3: Average Production Function
Variable
Coefficient
Intercept
0.0024
Dln(K/L)
0.6099
Dln(G/L)
0.2762
Dln(GAP)
0.4122
T
0.0001
D.W.
1.8407
R2
0.49
Source: (Delorme, 1999, p.568)
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
The economy consists of commodity goods (Y) and infrastructural goods (G) which enter all
production as an essential output. Production of Y relies on capital for commodity as well as
infrastructure, and G relies on capital for infrastructure. In the market economy, the household
owns all the capital , and they are charged a price for the capital services consumed. Profit
maximization increase the demand for K and G. Whereas in the Command economy the social
planner optimize the infrastructure. The figure 2 shows that economic growth rate achieved
by the market economy exceeds that of command economy. But market economy may not
realize this growth efficiently due to rival and non rival factors (social costs). Fully State
controlled economy also leads to suboptimal production. Public spending equals a fixed
portion of capital, whereas in market economy it is the private marginal product of capital
(Dasgupta, 1999, p.376).
Figure 2: Market growth rate dominates command growth rate
Source: Dasgupta, 1999, p.376
The economy has a large number of households with budgetary constraints. The government
purchases a portion of the private output to produce public services. A change in public
services affects the change in consumption through the change in capital and long run growth
rate. Starting from initial steady state , the government raises public spending financed by a
raise in taxes. This would crowd out private consumption due to raise of taxes and reduce
private capital due to crowd out effect. As in Barro, government spending increases growth
rate until an optimum point of government spending. As seen in the below figure (Figure 3),
the public spending increases the consumption by a shift in the curve and increase in marginal
productivity of capital . As this is financed by increase in taxes, private consumtion is reduced.
The new steady state E’ is a higher growth point. Also due to the shift in C=0 curve the growth
is higher in E’’. The limit to this is the Barro optima (g*) where the fall of savings (1-g-c) is
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
larger than the reduction in marginal productivity of capital (fall in k) (Mourmouras, 1999,
p.403).
Figure 3: The effects of an increase in public investment (when g , g*)
Source: (Mourmouras, 1999, p.403)
It is long been argued that high fixed costs of infrastructure investments require governments
to highly subsidize. However if a suitable financial model can be proposed, most infrastructure
do not require high subsidies. To model this, transportation investments with increasing fixed
costs are analyzed for the optimal capacity investment, toll levels, welfare, and cost recovery.
Traffic demand, user costs, and toll levels are considered in the table 4. F is shown as the fixed
cost and k the variable cost. Z is the optimal capacity, Y is the local demand,and C(Z) is the
associated cost, where θ is the toll. Depending on the optimal capacity Z, and the toll
collection opportunities, self-financing models can be created. Large projects are more
effective for governments since there are more toll collection opportunities as well as
economies of scale advantages (Borger, 2009, p.516).
Table 4: The cost structure of Infrastructure projects
K
18.69
16.82
14.95
9.35
5.61
3.74
1.87
F
0
2608
5216
13.04
18.256
20.864
23472
Θ
21.15
20.06
18.91
14.95
11.58
9.46
6.69
Y
1233
1246
1260
1307
1347
1373
1406
Z
1395
1486
1594
2091
2091
2783
5029
C(Z)
26,080
27,609
29,046
32,585
33,861
33,845
32,872
Toll revenue
26,080
25,001
23,830
19,545
15,605
12,981
9,400
1
0.9
0.8
0.6
0.5
0.4
0.3
Cost Recovery
Source: Borger, 2009, p.516
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
The majority of the previous research involves public capital as an indicator of infrastructure.
Today, railways, tramways, telephone systems, power distribution networks, and some
hydraulic works are privately owned. So there is a clear need for private infrastructure. The
below table is based on Spanish transport, communications, power distribution , hydraulic
works, urban and suburban infrastructure for public and private sectors. During period 18551866 Spain invested to railroads intensely as well as ports and telegraph system. After that
period Spain faced an infrastructure crisis which lasted until mid-1870s.
Two thirds of the investment was railroads, accounting 24% of the total resources in the year
1895. Later, the railroad investments stagnated due to the competition of main network and a
strategy to diversify infrastructure. This led to an increase in ports and urban and suburban
infrastructure and after telephone system and electricity distribution.
Finally in the period 1923-1936, roads , ports, and hydraulic works were the main investment
for the public when private sector invested electricity, telephone, and urban transport. In sum
Spanish infrastructure investments are concentrated on railroads and also diversified in other
fields.
The output (y) , infrastructure capital (g) , machinery and equipment capital ( k) and labor (n)
are shown for the Spanish data between 1850-1935 is shown in the Table 5. According to
causality results, GDP and machinery investment per worker are both helpful in prediction of
variables. Augmented Dickey-Fuller and Phillips-Perron unit root tests indicate that the
hypothesis that a unit root exists cannot be rejected. Engle –Granger and Johansen
cointegration results also inform presence of cointegration and finally the infrastructure capital
increases productivity of the economy as shown in the Table 5 (Loncan, 2007, p.458).
Table 5: Output and Infrastructure
Source: Loncan, 2007, p.458
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
4. Labor and Productivity
The role of the government is to obtain a sustainable infrastructure investment in a labor
production economy under capital constraint. To model this, government is assumed to make
the infrastructure investment and production firms are followers in a Stackelberg game. Firms
use infrastructure and labor to make a minimum amount of net profit. If the constraints are met
at the steady state, then the government strategies will be met given there is enough initial
infrastructure capital. The below figures show that the greater the public infrastructure, the
lower the investment should be. In addition when the capital is smaller than steady state level ,
it is optimal to invest more than I = 0.113217, to move towards steady state. Below figure
(Figure 4) also indicates that infrastructure investment leads to increase in employment. The
rate of employment changes sharply when infrastructure capital is low, after the steady state
level it decreases (Tapiero, 2008, p.884).
Figure 4: Investment and Labor
Source: Tapiero, 2008, p.884
Most of the research shows that the increase of productivity following 1995 is due to increase
in IT capital as well as human capital, hardware , and infrastructure. Non residential, non farm
output can be modelled as a function of technology index, labour , total stock, capacity
utilization, private capital and public capital. Information technology has a key role for the
production process in productivity of labour and capital, utility, and quality. U.S. economy is
modelled for the period 1975-2001. It is seen from the below table (Table 6) that information
technology and government infrastructure has been a significant contributor to economic
growth. Finally, there is a significant increase in the labor productivity (Duggal, 2007, p.498).
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Table 6: Factor growth accounting
%dQ
1993
1994
1995
1996
1997
1998
1999
2000
2001
5.73
7.17
4.88
5.21
7.23
5.6
5.57
7.05
1.36
KO
0.37
1.05
0.87
1.53
0.88
0.82
0.44
0.84
0.65
KIT
1.06
1.11
1.17
1.21
1.32
1.39
1.32
1.44
1.29
L
0.77
0.36
0.08
0.71
1.43
1.32
1.12
1.32
0.84
F
0.77
0.95
0.74
0.59
0.77
1.11
1.38
1.31
1.26
U
0.81
1.75
0.09
-0.78
0.84
-1.01
-0.68
0.07
-4.69
T
1.95
1.95
1.93
1.95
1.99
1.97
1.99
2.07
2.01
Due to a %d
in
Source: Duggal, 2007, p.498
5. Infrastructure Allocation and Government Policy
From the viewpoint of regional allocation of public infrastructure the government decides how
much infrastructure to allocate for each region with the budget obtained from taxpayers. The
size and need for infrastructure is different for regions. The value added for a region is a
function of employment, capital and infrastructure equipment. In the below table, French data
of 1985-1992 is used. The data includes regional GDP, regional employment, non-residential
private capital stock, transportation infrastructure stock and investment, number of companies
over 500 employees, political congruence, absolute value of election difference results.
According to the table table 7, capital, employment and infrastructure affects regional growth
and policy decisions are affected by political factors to some extent (Cadot, 2006, p.1145).
The regional allocation of transportation infrastructure may be categorized in two factors; this
are output per capita based on local needs and the political factors. Transport service demand
of a region depends on services provided by government and regional factors such as number
of vehicles. Due to the differences in population, output per capita, demand; vehicles,
congestion, political clout between regions, one needs to take into account efficiency equity
trade off, infrastructure needs, and political factors in the optimization of infrastructure
investment under budgetary constraints.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Table 7: Regional Growth and Policy Decisions
Source: Cadot, 2006, p.1145
Spanish data has been used for the period 1987-1996 in the Table 8. Economic determinants
have more explanatory capacity than political variables. Infrastructure investments adjust
slightly towards its long run value. Investments are sensitive to per capita output and share of
transportation services. Regional governments need more time to adjust long run values and
infrastructure needs and efficiency are more important factors. Political considerations play a
role where electoral productivity is higher. The production function should include
infrastructure investment as an endogenous factor as it affects production positively (Castells,
2005, p.1197).
Table 8: Structural parameters of key variables
Central Government
Regional Government
Transportation
Roads
Transportation
Roads
0.45
0.425
0.702
0.7
ln (Trucks / Y)
0.177
0.279
0.336
0.315
ln (Km)
0.042
0.046
0.101
0.076
ln (Air)
0.009
Equity Efficiency Tradeoff
Infrastructure Needs
0.009
Electoral Productivity
ln pxd3
0.144
0.158
0.075
0.075
lnpxd2
0.186
0.197
0.137
0.124
lnpxd1
0.228
0.235
0.157
0.173
lnpxd0
0.27
0.273
0.219
0.222
Source: Castells, 2005, p.1197
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
The allocation of infrastructure across regions is an important policy decision. The goal of the
government is to maximize social welfare, under budget and other resource constraints. The
goal of the government is to invest in infrastructure so that most people can have similar
standard of living. If there are regional differences, the people will mitigate to other regions
for better standards. In other words, one can talk about two allocation schemes, to equalize the
productivity across regions (balanced allocation schemes) and where infrastructure is
concentrated in one region (polarized allocation schemes). The two parameters to consider is
therefore β, degree of returns from infrastructure and γ, degree of regional differences in terms
of comparative advantage. Assuming Cobb-Douglas utility for spending and price index, when
β is sufficiently high for a given γ , (or when γ is sufficiently small) polarized allocation
scheme is optimal (Figure 5) (Takahashi, 1998, p.234).
Figure 5: Optimal Allocation Schemes for the Cobb-Douglas Utility Function
Source: (Takahashi, 1998, p.234)
6. Infrastructure Performance
One of the most important issues in infrastructure is to maintain profitability of asset
management. United Kingdom, Italy , Spain, New Zealand, Australia are among the countries
that apply these techniques, outsourcing when necessary. Most of the time, the operating
company is also responsible for maintenance. The key issues in asset management are
geographical allocation , asset valuation, performance standard, quantitative condition
assessment, performance forecast, asset management planning, asset renewal / replacement
analysis , and asset disposal. Asset management is active in all of the phases of asset life cycle
that is related with asset performance. Asset preservation significantly reduces the costs of
rehabilitation and replacement. Research has shown that life cycle costs of infrastructure can
be reduced 75-90% with preventive maintenance (Figure 6) (Dornan, 2002, p.47).
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Figure 6: Infrastructure Life Cycle – Preventive Maintenance
Source: Dornan, 2002, p.47
Risky assessment is a critical issue for infrastructure performance. Risk levels of infrastructure
are unlikely, moderate, likely and almost certain. Five categories of risk are insignificant,
minor, moderate, major and catastrophic. Infrastructure risks are the following; political risk;
economic risk; social risk; cultural risk; environmental risk; technology risk; supplier risk;
customer risk; risk of substitutes; competitor risk; barriers to entry risk; operational risk
(human resources); operational risk (training); flexibility and adaptability risk. Infrastructure
projects are analyzed in risk mapping as in the below figure to consider cost, benefit and risk.
(Figure 7) The X axis is the magnitude of consequences and Y axis is the probability.
Although political and economic risks are unlikely to occur, their magnitudes are extremely
significant. Social , environmental and cultural risks are more common. Risk of competitors is
among the most critical (Piyatrapoomi, 2004, p.209).
Figure 7: Risk Map for Infrastructure
Source: Piyatrapoomi, 2004, p.209
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Strategic awareness is a level of readiness that are made in advance of a natural disaster or a
man made activity to reduce the consequences and/or the probability of occurrence to an
acceptable level. The objective of this process is to minimize cost of preparedness , cost of
recovery and ineffectiveness of recovery, subject to limited resources, considering impact of
preparedness on recovery, and socioeconomic interdependencies. Each sector will invest in
optimal amount of preparedness investment.
Optimal amount of investment can be modeled based on a two sector model by increasing the
investment and analyzing the efficiency. The model presented in the below figure is prepared
based on the U.S.A. data. (Figure 8) The factors to consider are the effectiveness of
investment for individual sector recovery, the total nominal output of sectors relative to each
other, the interdependencies of sectors possibly to effect other sectors, the critical output for
the sectors. α is a system parameter indicating that a dollar investment to sector one generates
$12 prevention , whereas in sector 2 this is $8. These parameters are combined with other
parameters such as relative nominal output levels, sector interdependency and relative
criticality. Sector two is more than twice effective as sector one, however it is more than 4
times interdependent. These issues should be considered in the allocation of preparedness
funds through regulation or incentives (Crowther, 2008, p.652).
Figure 8: Preparedness Investment
Source: Crowther, 2008, p.652
7. Emprical Findings
A time series can be taken stationary only if its stochastic properties is not affected by an
incremental change in time. For the purpose of this study the U.S.A. data of GDP, total public
spending as percentage of GDP, CPI, Labor Productivity (Manufacturing Production / Output
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Hour), and Unemployment rate is used for the period 1792-2009. The data is suspected to be
non stationary.
In linear stochastic analysis, a unit root is 1 for the equation. In cases that the root is more than
1, the system is no longer stationary and will explode in linear regression. There are several
methods to test for the unit root. The data is tested as given in table 8 for non- stationary in the
popular Augmented Dickey Fuller approach. The test examines the null of ARIMA (Auto
regressive moving average) against the stationary time series. Benchmark critical values are
developed by Fuller in 1976. For empirical purposes we rely on finite samples where number
of lags is a factor (Cheung, 1995, p.277).
We use Schwarz Criteria to determine the number of lags in the analysis. From the table 9 it is
seen that all variables except CPI is non stationary. The ADF t-statistics exceed the critical
values at 5% level without trend. These series (except CPI) have a unit root (the hypothesis is
accepted) and are integrated in the order one I (1), the first differences.
Table 9: Augmented Dickey Fuller Results
VARIABLE
PUBLIC SPENDING / GDP
CPI
GDP
LABOR PRODUCTIVITY
UNEMPLOYMENT
ADF (LEVEL)
-0,2818(4)
-2,8748 (1)
-2,7289(8)
-2,0160(4)
-0,7903(3)
CRITICAL
VALUE
-2.8749
6.1375
-2.8752
-2.875
-2.8749
Due to the non-stationary structure of time series data, public spending /GDP is suspected to
Granger cause, Labor Productivity and unemployment. Granger Causality test is applied to
determine whether a specific time series can be used to explain the change in the other.
Granger methodology depends on a series of F-tests on the first differences in a lagged linear
regression analysis. In other words if past data of one series can be used to forecast other then
one granger causes the other. Table 10 indicates Granger Causality between public spending
and Unemployment and GDP.
Table 10: Granger Causality Test Results
Ho
Observation
F-statistic
Probability
Public Spending and Unemployment
SPENDING_GDP does not Granger Cause UNEMP
UNEMP does not Granger Cause SPENDING_GDP
215
828,532
239,893
0.00034
0.09330
Public Spending and Labor Productivity
LABOR_PR does not Granger Cause SPENDING_GDP
SPENDING_GDP does not Granger Cause LABOR_PR
215
223,760
927,824
0.10925
0.00014
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
According to Granger Causality Test results, under 5% significance level, the hypothesis that
public spending does not Granger Cause unemployment can strongly be rejected however
unemployment does not granger cause public spending can not be rejected. As expected this is
an indicator that there is a one way relationship indicating that public spending granger causes
unemployment. In other words, there is a strong relationship between public spending and
employment. In times of financial volatility, government spending on infrastructure would
also create employment in the economy. Similarly there is a one way relationship between
public spending and labor productivity, indicating that public spending Granger causes labor
productivity, explained by hourly manufacturing production. This creates a better investment
environment for the economy.
8. Conclusion
In this paper it’s been shown that developed economies underinvest to infrastructure. In the
periods of financial volatility, there is a decrease in total output and employment. This paper is
an evidence of the positive effects of infrastructure spending in the period of financial turmoil.
The efficiency gains and additional fund creation possibilities in the infrastructure projects
may require private sector investments.
Public spending determines the performance of the economy as there is the finding that every
dollar spent on public infrastructure increases GDP by $ 1.59. In other words public spending
also increases private output. Thus, government spending would help to balance the reduced
growth rates and high unemployment in economic crisis, given an optimal amount of spending
is allocated for infrastructure.
References
Acconcia, A. (2000). On growth and infrastructure provision, Research in Economics.
Borger, Bruno De, Fay Dunkerley and Stef Proost (2009). Capacity cost structure, welfare and
cost recovery: Are transport infrastructures with high fixed costs a handicap?, Transportation
Research
Cadot, Olivier, Lars-Hendrik Roller, Andreas Stephan (2006). Contribution to productivity or
pork barrel? The two faces of infrastructure investment, Journal of Public Economics
Castells, Antoni and Albert Sol,e-Oll,e (2005). The regional allocation of infrastructure
investment: The role of equity, e'ciency and political factors, European Economic Review
Cheung, Yin-Wong, Kon S. Lai (1995). Lag order and Critical Values of the Augmented
Dicky Fuller Test , Journal of Business and Economic Statistics
Gordon L. Clark and Amanda Root (1999). Infrastructure shortfall in the United Kingdom: the
private finance initiative and government policy, Political Geography
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Crowther, K.G. (2008). Decentralized risk management for strategic preparedness of critical
infrastructure through decomposition of the inoperability input–output model, International
Journal of Critical Infrastructure Protection.
Dasgupta, Dipankar (1999). Growth versus welfare in a model of nonrival Infrastructure,
Journal of Development Economics.
Delorme, Charles D., Herbert G. Thompson and Ronald S. Warren (1999). Public
Infrastructure and Private Productivity: A Stochastic-Frontier Approach, Journal of
Macroeconomics
Dornan, D.L. (2002). Asset management: remedy for addressing the fiscal challenges facing
highway infrastructure, International Journal of Transport Management.
Duggal, Vijaya G., Cynthia Saltzman, Lawrence R. Klein (2007). Infrastructure and
productivity: An extension to private infrastructure and it productivity, Journal of
Econometrics
Lonca´n, Alfonso Herranz (2007). Infrastructure investment and Spanish economic growth,
1850–1935, Explorations in Economic History
Mourmouras, Iannis A., Jong Eun Lee (1999). Government Spending on Infrastructure in an
Endogenous Growth Model with Finite Horizons, North Holland.
Ortiz, Isabel (2009). Fiscal stimulus plans: The need for a global new deal,
www.networkideas.org/news/mar2009/Fiscal_Stimulus_Plans.pdf
Piyatrapoomi, N., A. Kumar and S. Setunge (2004). Framework for Investment decision
making under risk and uncertainity for infrastructure asset management, Research in
Transportation Economics.
Romer, Christina and Jared Bernstein (2009). The Job Impact of American Recovery and
Reinvestment Plan, Council of Economic Advisors.
Takahashi, Takaaki (1998). On the optimal policy of infrastructure provision across regions,
Regional Science and Urban Economics.
Tapiero, C.S. and K. Kogan (2008). Sustainable infrastructure investment with labor-only
production, Int. J. Production Economics.
Zandi, Mark (2009). The Economic Impact of the American Recovery and Reinvestment Act,
Moody’s.
Zhu, Xueqin, Jos Van Ommeren b,c, Piet Rietveld (2009). Indirect benefits of infrastructure
improvement in the case of an imperfect labor market, Transportation Research.
86
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Anas Al BAKRI
School of Economics and Finance
University of Western Sydney, Australia
[email protected]
GLOBALIZING FINANCIAL SYSTEMS AND
ECONOMIC GROWTH IN THE MIDDLE EAST REGION
Abstract
Due to the benefits that resulted from globalizing financial system, it has been widely accepted
in the literature of this field that financial system globalization play a vital role in improving
resource allocation through the financial markets, thereby increasing safety of financial
systems operations and also thereby strengthening the local emerging financial system and
markets in the Middle East region (World Bank, 2008). One of the main reasons for this paper
which focusing on the influence of globalizing financial systems (GFS) on the economic
growth in the Middle East region is because there is an increase in funds flowing from
developed industrial countries toward the emerging Middle Eastern financial markets.
Therefore these Middle Eastern financial systems are becoming increasingly important in
terms of globalizing financial systems. Hence, and based on literature and empirical evidence,
GFS raises the economic growth in Middle Eastern economics through a number of channels
(IMF, 2006). Some of these channels are directly affect the determinants of economic growth
rate, and indirect channels, which in some cases could be even more important than the direct
ones. Evidence from financial analysts, economic theories and financial indicators that are
presented in this paper suggest that GFS should be approached carefully in the ME, with good
institutions and macroeconomic framework viewed as important. The review of the available
evidence does not, however, provide a clear road map for the optimal rapidity and running of
GFS. Therefore, this paper aims to provide theoretical and empirical evidences, which explore
the effect of GFS on the economic growth in the Middle Eastern emerging financial systems
and markets.
Keywords: Globalizing financial system, Emerging economics, Global financial crises.
1. Introduction
Financial systems play a critical role as a channel for the transfer of financial resources such as
capital, funds and assets from net savers to borrowers. The analysis of the influence of the
globalizing financial systems (GFS) on the economic growth has attracted a great deal of
interest in recent times. The term GFS refers to an area of research in financial economics that
covers many aspects of inter-relationships between financial system participants. The issues of
GFS and analysis of the economic growth in the emerging markets in the Middle East (ME)
have received a great deal of interest among academic researchers and practitioners.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
In recent year, the changing nature of the financial system has become an increasing focus of
policy interest and of academic studies. Based on the financial analysts and economists, these
changes and GFS may be seen as (i) necessary and welcome progress towards a more efficient
of local financial system, which provides financial institutions (FIs) more cost-efficiently and
allocates capital more efficiently than has been previously the case; and/or (ii) they are seen as
threatening to financial system stability and as a development towards a financial system that
is level to crisis at frequent periods (IMF, 2006; World Bank, 2008). IMF (2006) shows that
financial system are the combination of all FIs, institutional and individual investors and
financial markets together, which have an essential and major role in the performance of the
economy. Ross (2002) noted that in today’s economy, the financial system mainly consist of a
central bank, banks, non-bank financial institutions (NBFI), and financial markets. Hence, and
based on literature and empirical evidence, GFS raises the economic growth in Middle Eastern
economics through a number of channels (IMF, 2006). Some of these channels are directly
affect the determinants of economic growth rate, and indirect channels, which in some cases
could be even more important than the direct ones.
The emerging financial markets in the ME have achieved considerable improvements over the
last ten years. Several factors have played vital roles in these improvements, such as the
conduct of sound macroeconomic policies, financial system reforms, privatization, financial
liberalization, and stock market integration. One of the main reasons for this paper focusing on
the influence of the GFS on the economic growth in the ME is because there is an increase in
funds flowing from developed industrial countries toward emerging financial systems and
markets in the ME. Hence, these Middle Eastern financial systems are becoming increasingly
important in terms of GFS. Therefore, this paper aims to provide theoretical and empirical
evidences, which explore the effect of GFS on the economic growth in the ME. In particular,
this paper focuses on emerging markets in this region, namely Bahrain, Egypt, Jordan, Kuwait,
Lebanon, Oman, Qatar, Saudi Arabia, Syria and United Arab Emirates. The ten countries that
are considered in this study have adopted several sound macroeconomic policies and financial
system reforms over the last ten years which have contributed to higher economic growth.
These policies and reforms include trade and financial liberalization, privatization programs
and openness to foreign directed investment (FDI). Moreover, these reform policies are
considered as indispensable in order for these countries to face the growing financial and
economic challenges that resulted from the recent global financial crisis (GFC) and changes in
the global economy. Thus, GFS without an appropriate set of requirements might lead to few
economic growth benefits and more output and unpredictability consumption in the short run.
The rest of the study is structured as follows: section 2 outlines an overview of GFS; a
revision of the related features and factors. Section 3 presents the benefits and the relationship
of the GFS and economic growth in the ME, which determines the direct and indirect channels
to enhance economic growth that derived from GFS. Section 4 highlights the impact of the
GFC on the economic growth in the ME. The last section 5 presents the conclusions,
contributions and recommendations for this study.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
2. Globalizing Financial System; Features and Factors
Globalizing financial system (GFS) and financial system integration are, in principle different
concepts. GFS is an aggregate concept that refers to rising global linkages through crossborder financial flows (IMF, 2008). Financial system integration refers to an individual
country’s linkages to international capital markets. For instance, increasing GFS is necessarily
associated with rising financial system integration on average (IMF, 2008; World Bank,
2008). Based on literature and empirical evidence, GFS raises the economic growth in the ME
through a number of channels (AMF, 2008). Some of these directly affect the determinants of
economic growth. On the other hand, indirect channels, which in some cases will be even
more important than the direct ones, include increased production specialization due to better
risk management, and improvements in both macroeconomic policies and institutions
encouraged by the competitive pressures or the “discipline effect” of the globalization (World
Bank, 2008).
The features of global capital flows within GFS in the ME are:
1- The level of global capital flows has risen substantially in the last 5 years. Not only has
there been a much greater volume of flows among developed industrial countries but
there has also been sudden increase in flows between industrial and the emerging
Middle Eastern economics, and
2- This increase in global capital flows to the ME is the outcome of both “pull” and
“push” factors. (i) Pull factors arise from changes in policies and other aspects of
opening up by the ME (Brau and McDonald, 2009). These include liberalization of
capital accounts, domestic stock markets, and large-scale privatization programs. (ii)
Push factors include business cycle conditions and macroeconomic policy changes in
both the developed and the emerging Middle Eastern markets (Brau and McDonald,
2009).
In addition, the rapid development of communication and widespread of using the Internet in
the ME - as one aspects of globalization- has been considered as important tool for GFS,
economic growth and financial markets (Sherman and Rowley, 2006). This tool enable
institutional and individual investors, agents, traders and all participants in financial system to
have the access to information, and consequently the ability to manage their portfolio more
efficiently. IMF and World Bank (2008) reported that some of major factors, which
encouraging high level of interest in GFS and investments by local and global institutional and
individual investors in the ME are:
- Lack of local financial investment opportunities
- Interest rate differentials
- Greater liquidity of global stock markets
- Political and economic diversification
- Perceived comparative advantage
- Substantial growth in available investment funds
- Changes in foreign investment policy
- Investment stability
- Strong economy
- Improved global communication and financial system information
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
- Access to investment capital
- Greater collection of investment choices
3. The Influence of Globalizing Financial System on the Economic Growth in the Middle
East
3.1 Introduction
At the beginning of the 21st century a huge amount of capital flows into the ME financed
infrastructure projects such as railroads and direct investment in foreign companies (Foreign
Direct Investment- FDI) have been increased (Marashdeh, 2007). A stock markets in the ME
as one of the main financial system combination, which it is a system that allows both
institutional and individual investors to easily buy and sell financial securities such as stocks,
bonds, commodities - such as valuable metals or agricultural goods- and other tangible items
of value at low transaction costs and at prices that reflect efficient markets (Marashdeh, 2007).
On the other hand, according to Bloomberg, Macquarie Research (2009), eight of the top ten
best performing stock markets in the world in 2008 were in the ME. Saudi Arabia has become
one of the world’s largest emerging stock markets by capitalization. This liquidity, along with
the high oil prices in the Q2 and Q3/2008 has created a substantial cash surplus in the region
(Macquarie Research, 2009).
3.2 The GFS Direct and Indirect Channels Enhancing Economic Growth in the ME
There are a number of direct and indirect channels through which embracing GFS enhancing
the economic growth in the ME. These channels are inter-related in some ways, but this
explanation is useful for reviewing the importance of each channel. However, it has confirmed
difficult to empirically identify a strong causal relationship between the GFS and the
economic growth. The following points represent the direct channels, which enhancing the
economic growth in the ME:
1- GFS allows for increased investment in the ME while provides a higher return on
capital (ROC, ROI) than is available in developed industrial countries. This effectively
reduces the risk-free rate within the ME.
2- Improves the allocation of risk through following steps: (i) Increased risk sharing
opportunities between global and local investors help to diversify risks (Claessens et al
2004). (ii) This ability to diversify in turn encourages FIs to take on more total
investment, thereby enhancing economic growth. (iii) As capital flows increase, the
domestic emerging stock market becomes more liquid, which reduce the equity risk
premium, thereby lowering the cost of raising capital for investment (Claessens et al
2004).
3- International portfolio flows can increase the liquidity of domestic emerging stock
markets in the ME (Marashdeh, 2007). Hence, increased global ownership of domestic
FIs generates a variety of other benefits such as: (i) Foreign FIs participation facilitate
access to international financial markets (Saunders and Millon, 2004). (ii) Improves
the regulatory and supervisory framework of the domestic FIs industry (Saunders and
Millon, 2004). (iii) Foreign FIs introduce a variety of new financial instruments and
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
techniques and also promote technological improvements in domestic markets (Brau
and McDonald, 2009; Saunders and Millon, 2004).
4- Financially globalized economies seem to attract an exceptionally large share of FDI
inflows, which have the potential to generate technology spillovers and to serve as a
channel for passing on better management practices (AMF, 2007). These spillovers can
raise aggregate productivity and, in turn, boost economic growth.
The following figure (1) presents the direct channels which enhancing the economic
growth in the ME.
High ROI/ROC
Increase Capital
Flows
Globalizing
Financial
System
Increase Risk
Sharing
Economic
Growth
Increase
Liquidity
Raise Aggregate
Productivity
Figure 1. Direct Channels to Enhance Economic Growth
On the other hand, the following points represent the indirect channels, which enhance the
economic growth in the ME:
1- Specialization in production increases productivity and economic growth is intuitive.
In principle, GFS plays a useful role by helping countries in the ME to engage in
international risk sharing and thereby reduce consumption volatility (AMF, 2007).
Eventually, this risk sharing would indirectly encourage specialization, which in turn
raises the economic growth in the ME.
2- GFS increases productivity in an economy through its impact on the government’s
ability to credibly perform to a future course of policies (AME, 2008; World Bank,
2008). More specifically, the disciplining role of GFS changes the dynamics of
domestic investment in an economy to the extent, which it leads to a reallocation of
capital towards more productive activities in response to changes in macroeconomic
policies.
3- A country’s readiness to undertake GFS interpreted as an indicator that it is going to
practice more responsive policies towards foreign investment in the future (IMF,
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
2008). The removal of restrictions on capital outflows leads to an increase in capital
inflows, indeed, increase economic growth. Many countries, including, GCC, Egypt,
Jordan and Lebanon have received significant capital inflows after removing
restrictions on capital outflows (AMF, 2007).
The following figure (2) presents the indirect channels which enhancing the economic
growth in the ME.
Specialization in
Production
Globalizing
Financial
System
Government
Ability
Engage in
International
Risk Sharing
Improve
Productivity
Reduce
Consumption
Volatility
Economic
Growth
Increase Capital
In/Outflows
Country
Readiness
Improve
Resource
Allocation
Carefully of
Financial
Operations
Figure 2. Indirect Channels to Enhance Economic Growth
3.3 The Impact of GFS on the Economic Growth and Financial Indicators in the ME
The gross domestic product (GDP) for the ME is projected to slow to 3.9 % in 2009 and a
quick resolution of the global financial crisis in high income countries could produce an
increase in GDP to 5.2 % in 2010 (CIA, 2008). The ME region witnessed a sharp rise in
inflation as a result of the surge in global prices for food and feed grains, together with an
increased demand in several economies. The world is becoming more urban, and decisions are
increasingly being decentralized to cities and municipalities. The following collected data for
the ME countries are based on the World Bank, International Monetary Fund (IMF), and the
CIA (2007; 2008). These data include: Population; GDP in US dollars; GDP per capita;
inflation rate; unemployment rate; trade and government statistics, which present the changes
and improvements on these economic indicators.
The following Tables 1 and 2 provide major of economic statistics and indicators comparison
(2007-2009) for GDP as one of economic growth indicators in the ME (Arabian Business,
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
2009). Also Tables represent GDP, inflation, unemployment rates, and current account
balance in the ME.
Table 1: Economic Statistics for GDP in the ME (2007-2009) (US$)
Country
Population
GDP 2007
GDP 2008
GDP
Forecasted
World Ranking
GDP Per
World
(Million)
(Billions)
(Billion)
2008 %
GDP 2009 %
GDP 2008
Capita 2008
Ranking
Bahrain
0.779
17.40
19.675
13.09
13.43
96
25,245.41
32
Egypt
75.045
127.97
158.255
23.67
23.95
52
2,108.80
116
Jordan
5.854
15.83
19.124
20.79
21.92
98
3,266.52
103
Kuwait
3.443
111.51
159.73
43.24
43.46
51
46,396.74
19
Lebanon
3.799
24.64
28.024
13.73
13.83
83
7,375.85
68
Oman
2.595
40.39
56.318
39.43
40.04
68
21,703.79
34
Qatar
1.098
73.26
116.851
59.51
59.74
56
106,459.62
2
KSA
24.897
381.94
528.322
38.33
39.09
20
21,220.62
35
Syria
19.88
38.97
44.492
14.17
14.43
75
2,237.96
114
UAE
4.764
190.74
269.956
41.53
42.40
36
56,666.70
8
The ME
-
1,399.70
1,919.11
37.11
37.22
0
-
-
Advanced
-
39,188.16
42,694.95
8.95
9.74
0
-
-
The World
-
54,584.92
62,054.13
13.68
14.02
0
-
-
World's Av
-
301.57
342.84
13.69
14.03
0
-
-
Economies
Source: Developed for this study
The above Table 1 shown that GDP for World Average in the previous year 2008 was 13.69%
which is more than was in 2007. In the current forecasted year, 2009, GDP for the World
expected to reach US$64,167.96 Billion, which is 3.41% more than the 2008 figure. At the
same time, GDP for the ME in the previous year 2008 was US$ 1,919.11 Billion. On the other
hand, in year, 2007, GDP for the ME was US$ 1,399.70 Billion, but GDP for the ME in 2008
is 37.11%, which is more than was in 2007. In addition, in the current forecasted year, 2009,
GDP for the ME expected to reach US$2,140.45 Billion, which is 11.53% more than the 2008
figure (CIA, 2008).
Investment (% of GDP) for the World in the previous year 2008 was 23.528 %, in the current
forecasted year, 2009; Investment (% of GDP) for the World expected to reach 23.58 %,
which is 0.23% more than the 2008 figure. At the same time, investment (% of GDP) for the
ME in the previous year 2008 was 24.546 %; hence the ME is 1.02 more than the average.
Further, in the current forecasted year, 2009, Investment (% of GDP) for the ME expected to
reach 25.75 %, which is 4.89% more than the 2008 figure (CIA, 2008).
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Table 2: Economic Statistics for Inflation, Unemployment Rates and Current Account
Balance in the ME for 2008 (Indexed to Year 2000)
Country
Inflation Rate
World
Unemployment
Current Account
World
%
Ranking
Rate %
Balance (% GDP)
Ranking
Bahrain
12.6
127
3.5
1.802
14
Egypt
17.8
61
8.7
0.561
59
Jordan
15.3
86
13.0
-1.846
158
Kuwait
13.2
107
2.2
4.459
3
Lebanon
13.4
103
10.0
-1.398
148
Oman
12.9
119
5.0
1.006
26
Qatar
17.6
63
0.6
4.291
4
KSA
12.2
145
15.0
3.249
7
Syria
12.5
131
9.0
-2.722
74
UAE
12.0
N/A
12.7
2.256
10
Middle East
-
-
-
2.285
0
Advanced
-
-
-
-1.008
0
The World
-
-
-
-
-
The World's
-
-
-
-
-
Economies
Average
Source: Developed for this study
•
•
Data for inflation are end of the period, not annual average data. The index is based on 2000=100.
Current Account Balance based upon balance of payment, and calculated as the sum of the balance of
individual country.
As shown in Table 2 the current account balance (% GDP) in the ME in the previous year
2008 was 22.856 %. However, in year, 2007, it was 18.36 %. Hence, the current account
balance (% GDP) in the ME in 2008 was 24.46% more than it was in 2007. In addition, in the
current forecasted year, 2009, the current account balance (% GDP) in the ME expected to
reach 17.05 %, which is 25.40% less than the 2008 figure (CIA, 2008).
The Middle Eastern countries that responded to high food prices by increasing wages of select
groups to help mitigate the worst of the impact on living standards are now having to deal with
increased inflationary effects. In December 2008 developments in global commodity markets
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
over the last three years, notably in 2008, have had an impact on the ME, and resulted in
substantial up and down shifts in terms of trade, current account positions, and external
financing requirements. While these shifts occurred at a time when the external environment
for growth and for international finance deteriorated, GDP held up well through 2008 and the
pace of GDP growth for the ME was unchanged in 2008 from the strong 5.8% registered in
2007 (World Bank, 2008). On the other hand, contraction of net exports is the main cause of
the real GDP decline in the ME. Specifically, Kuwait is projected to grow at 0.7 %, KSA at
0.7 % and UAE at 0.5 %. Qatar is projected to grow at 7.0 %, a rate well above the region’s
average. Bahrain and Oman are projected to record moderate growth rates of 2.0 % and 1.5 %,
respectively, based on moderate decline in crude oil production levels. During 2008, the
Middle Eastern countries saw increased investment activity in the construction, property,
telecommunications, financial and service sectors. Despite consist efforts in industrial
development; the region has yet to establish itself as a sufficiently strong manufacturing base
for export-led growth.
The following Table 3 shows the real GDP growth rates and consumer inflation rates as
annual percentage changes in the ME for period (2006-2009).
Table 3: Real GDP Growth Rate and Consumer Inflation Rate in the ME (2006-2009)
(Annual Percentage Change-Based on GDP 2000 Constant Prices)
Country
Real GDP Growth Rate
Consumer Inflation Rate
2006
2007
2008
2009
2006 2007
2008
2009
Bahrain
6.5
8.1
6.3
2.0
2.1
3.3
3.5
3.5
Egypt
7.1
7.2
6.5
5.4
7.6
9.5
17.1
9.7
Jordan
6.3
6.0
6.0
3.6
6.3
5.4
14.0
6.5
Kuwait
6.3
4.6
6.1
0.7
3.1
5.5
10.4
5.7
Lebanon
0.0
4.0
5.5
3.0
1.5
6.7
11.7
5.7
Oman
7.2
6.1
6.0
1.5
3.4
5.9
12.4
6.0
Qatar
12.0
9.5
16.0
7.0
11.8
13.8
15.0
11.2
KSA
3.2
3.4
4.2
0.7
2.2
4.1
9.9
4.5
Syria
5.1
6.6
6.5
3.2
10.0
4.5
14.7
6.0
UAE
9.4
5.2
7.4
0.5
9.3
11.1
18.6
5.2
Source: Developed for this study, ESCWA, (2009)
On the other hand, Saudi Arabia (KSA) ranks 27th in the global competitiveness report 20082009 issued from WEF. Several countries in the ME are in the upper half of the rankings, led
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
by Qatar (26th), Saudi Arabia (27th) and United Arab Emirates (31st). The following Table 4
represents the global competitiveness index (GCI) for the ME (2008- 2009).
Table 4: Global Competitiveness Index (GCI) for the ME Countries 2007-2008 Comparison
Market
GCI (2008-2009) Ranking
GCI (2007-2008) Ranking
USA
1
1
Singapore
5
7
Germany
7
5
Japan
9
8
Hong Kong
11
12
UK
12
9
France
16
18
Australia
18
19
Malaysia
21
21
Qatar
26
31
KSA
27
35
Spain
29
29
UAE
31
37
Kuwait
35
30
Bahrain
37
43
Oman
38
42
Jordan
48
49
Italy
49
46
Syria
78
80
Egypt
81
77
Source: WEF (2009)
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3.4 The Emerging Stock Markets in the ME
The ME region is one of the world's fastest growing emerging markets and financial systems
especially in the banking sector and capital market. The evidence is that a competitive banking
sector, liquid equity and debt markets in the ME are strongly associated with higher economic
growth rate in the region. Financial markets tend to promote efficiency in allocating
investment, and hence contributing to the productivity growth by:
• Improving the management of risk
• Identifying productive projects and efficient firms
• Promoting corporate governance
• Mobilising savings; and
• Justifying the adverse effects of global financial crisis.
The emerging financial market and financial investment liberalization have been the origin of
many recent cases of GFS in the ME. The emerging stock markets in the ME have achieved
substantial improvements in the last decade. Several factors have played vital role in the
Middle Eastern financial markets growth, such as the achievement of higher economic growth,
monetary stability, stock market reforms, privatisation, financial liberalization and institutional
framework for investors (Claessens, et al. 2004). Marashdeh (2007) noted that the
performance of stock markets in the ME and the prices of stocks depend significantly on the
speculation of the investors. Hence, over- responses and incorrect speculation can give raise to
unreasonable behaviour of the stock market. Excessive optimistic speculation of future
predictions in the emerging Middle Eastern markets can raise the prices of stocks to a
tremendous high and unnecessary pessimism on the part of the investors can result in
extremely low prices (Syrian Securities and Exchange Commission, 2006). Today, with the
expansion of economies of the ME, there has been unprecedented growth in new FIs targeting
to compete with global players for a greater share of the regional stock markets.
4. The Influence of the Global Financial Crisis on the Economic Growth in the ME
The fundamental financial system of the country is a sound and prosperous basis. The origin
of current global financial crisis (GFC) has been noted that the decade of the 21st saw a
commodities boom, in which the prices of most important properties rose again after the latetwentieth century commodities recession of 1980-2000. But in 2008, the prices of many
commodities such as oil and food, got so high to cause real economic damage, threatening and
a reversal of globalization http://research.cibcwm.com/economic_public/download/smay08.pdf.
The financial phase of the current GFC leads to emergency interventions in many national
financial systems (IMF, 2008). As the GFC developed into genuine recession in many major
economies, economic stimulus meant to recover economic growth became the most common
policy tool. To date, the direct effects of the GFC experienced by most developing economies
in the region have been relatively mild, as banks and other FIs in the ME were not large
holders of subprime mortgage-backed securities (AMF, 2008; World Bank, 2008). But indirect
effects are increasingly becoming evident with spread on sovereign debt increasing and equity
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
market witnessing sharp decline. Gross capital flows to countries in the ME have also
declined, and expected to weaken further (Arabian Business, 2008). The GFC affects on GDP,
inflation and unemployment rate in the ME. Thousands of workers lost their jobs during the
following months of the GFC, and so, the slump continued until now, unemployment rates
around the world have being increased more than ever before. In general, GDP as one of
economic growth indicators in the ME is 6.5 percent in 2008, up slightly from 6.4 percent in
2007. On the other hand, a jump in bank borrowing from $4 billion to $14 billion over the last
year to Jun 2009 offset a falloff of some two-thirds in bond and equity issuance in the period,
but outright decline in capital inflows is likely as we move into 2010. Further, the strict
regulations imposed by the central banks in some countries in the ME such as Saudi Arabia,
Qatar, UAE, Kuwait, Bahrain, Oman, Lebanon, Syria, Egypt and Jordan were crafted to make
these immune to political crisis; and so far, this has applied to the global economic crisis as
well. However, economic statistics shows that the Middle Eastern FIs remain, under the
current circumstances, high on liquidity and reputed for their security. Thus, the GFC has
increased requests for merger approvals, particularly for failing FIs. Institutional investors
suggest that the emerging markets in the ME, Asia-Pacific and Eastern Europe are least
affected by the GFC. Conversely, North America and Europe are felt to be most seriously
impacted by the GFC (Jones Lang LaSalle (JLL), 2009). Towards the end of the 2009, the
huge public and government spending programs around the world began to take effect,
bringing the promise of renewed growth in the developed countries and recovery for the world
economy growth.
5. Conclusions, Contributions and Recommendations
5.1 Conclusions
There is no systematic examination of how the GFS affected on the economic growth in the
ME. The lack of a strong and robust effect of GFS on the economic growth does not
necessarily imply that theories that make this connection are wrong. The evidences and the
economic and financial indicators that have been presented in this paper suggest that GFS
should be approached carefully in the ME, with good institutions and macroeconomic
frameworks viewed as important. The review of the available evidence does not, however,
provide a clear road map for the optimal rapidity and running of GFS. GFS helps countries to
reduce macroeconomic volatility. The Middle Eastern economics may have little choice but to
strengthen their financial system linkages eventually in order to improve their economic
growth potential in the long run (CIA 2007; 2008). The problem is how to manage the shortrun risks apparently associated with GFS. Hence, GFS without a proper set of preconditions
lead to few economic growth benefits and more output and consumption volatility in the short
run.
It is important to acknowledge that the scale of the current GFC is unprecedented. The
implications have been much more thoughtful than any previously witnessed and are being felt
all of the ME countries – a consequence of the increasingly GFS and open global financial
markets. While the Middle Eastern financial systems are continuing to attract top investment
projects, with billions of dollars, there are some concerns that the GFC could see funding dry
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
up, especially now that the big spending Gulf Countries (GC) are being hit by the GFC (IMF,
2009).
While the role of the GFS in the ME in promoting economic growth has been challenged in
the past, it is now widely recognised (Arabian Business, 2009). GFS development and the
economic growth are an efficient way of attracting local and foreign investors to invest in
financial instruments in the ME. Hence, it is important to understand exactly how GFS in the
ME operate to attract more investors to invest in the ME. Due to the benefits that resulted from
GFS, it has been widely accepted in the literature that GFS plays a vital role in improving
resource allocation through the financial markets, thereby increasing safety of financial
operations and also strengthening the local emerging financial systems and markets in the ME
region. Given the current state of GFS in the ME, the development of stock markets involving
cross-border movement of funds is challenging as it has to address many of existing
impediments to greater GFS and economic growth in the ME region.
With the continued effect of the GFC into 2009, seeing significantly reduced stock investment
activity globally, this has seen many major global investors retreat to their local markets
seeking local investment opportunities in often distressed local environment. This will
continue to play out over 2009-2010 effecting all stock markets including these in the ME.
Hence, as result of this situation, it is seeing significantly reduced the economic growth
particularly in the stock market performance in the ME over 2009-2010.
5.2 Contributions
1. Identified the characteristics of GFS and the economic growth in the ME.
2. Contributing to a better understanding of the influence of GFS on the economic growth;
particularly stock markets in the ME.
3. Providing a background of the emerging financial system and stock markets in the ME and
how it could continue to be important information for investors.
4. Examining the impact of the GFC on the economic growth and the emerging stock market
performance in the ME.
5.3 Recommendations
1. For the purpose of promoting the stability, integrity, diversity and efficiency of financial
systems in the ME, it is crucial that the emerging Middle Eastern stock markets should work
more closely together to size the investment opportunities.
2. As a result, the ME will be in a better position to benefit from a higher retention of saving in
our region. Therefore, the greater stability and efficiency in capital flows in the ME enhance
the economic growth, diversification and integrity of stock markets.
3. Global unemployment rate has rocketed and there has been a dramatic increased in the
numbers of business liquidations, including a number of prominent long established brand
names. This trend is set to continue throughout the developed economies over the course of
2009 unless critical action is taken by world leaders on a rescue package that will enable the
international money markets to start functioning again.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
4. The ME countries need to enhance its understanding and promote wealth creation within the
local economy.
5. Increased knowledge to developing new investment sector performance indices for the
listed companies in the ME stock markets regarding emerging markets.
6. Restoring confidence to the financial markets and stimulating economic activity in the ME
will be central to the economic growth and stock market recovery.
References
Arab Monetary Fund (AMF) (2008). Articles and Publications. Retrieved on 15/ Feb/2009,
http://www.wto.org.
Arab Monetary Fund (AMF) (2007). Financial Reforms in Gulf countries (GCC) retrieved on
15/Feb/2009, http://www.wto.org.
Arabian Business, (2009). Real estate statistic and issues.
Brau, E., and McDonald, I. (2009). Successes of the International Monetary Fund: Untold
stories of cooperation at work. Palgrave Macmillan, New York.
Claessens, S., Daniela K., and Sergio L. (2004). Stock market development and
internationalization: Do economic fundamentals spur both similarly? CEPR Discussion Paper,
3301.
CIA Fact Book. (2007; 2008). Statistics and various issues.
Damascus Securities Exchange (DSE). (2009). Retrieved 15/March/2009 www.dse.gov.sy
El-Erian, M., and Manmohan, S. (1994). Emerging equity markets in Middle Eastern
countries, IMF Working Paper, 94-103.
ESCWA. (2009). Survey of Economic and Social Developments in the ESCWA Region.
International Monetary Fund (IMF). (2007). Articles and Publications. Retrieved
13/December/2009.
International Monetary Fund (IMF). (2008). Articles and Publications. Retrieved
13/December/2009.
International Monetary Fund (IMF). (2006). “Arab Republic of Syria”, IMF Article IV
Consultation, 1-4.
Jones Lang LaSalle. (2008). Global real estate transparency index.
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Macquaries Securities Group. (2009). Global property securities analytics; Monthly Report,
Jan.
Macquarie Research Equities (2009). Global property securities analytics; Monthly Report,
July.
Marashdeh, H. (2007). Are the stock markets in the Middle East region efficient? International
Review of Business Research Papers, 3 (5), 297-307
Ross, P. (2002). Commercial bank management, 5th edition. The McGraw-Hill, Book
Companies, New York.
Saunders, A., and Millon, M. (2004). Financial markets and institutions, 2nd edition.
McGraw-Hill.
Sherman, H., and Rowley, D. (2006). To invest or not to invest: that is the question. Journal of
the International Academy for Case Studies, 12 (6), pp.59-75.
Syrian Securities and Exchange Commission (SSEC). (2008). Retrieved 4/Sept/2008,
http://www.scfms.sy, Damascus-Syria.
World Bank. (2007; 2008). Various issues.
World Economic Forum. (2007). The Global Competitiveness Report.
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Iszmi ISHAK*
Faculty of Business Administration
Universiti Tun Abdul Razak, Malaysia
[email protected]
Ahmad Subhi Muhammad SIDEK*
College of Business Management and Accounting
Universiti Tenaga Nasional, Malaysia
[email protected]
Azwan Abdul RASHID
College of Business Management and Accounting
Universiti Tenaga Nasional, Malaysia
[email protected]
THE EFFECT OF COMPANY OWNERSHIP ON THE TIMELINESS OF
FINANCIAL REPORTING: EMPIRICAL EVIDENCE FROM MALAYSIA
Abstract
The IASB’s Framework for the Preparation and Presentation of Financial Statements
considers timeliness as an important qualitative characteristic of financial information. To be
relevant and useful, financial information must be provided to users within the time period in
which it is most likely to bear on their decisions. For an emerging market economy, timeliness
in reporting of otherwise non-publicly available financial statement information remains, for
the most part, the only means by which outside shareholders and investors keep themselves
informed about firm performance. In the present economic scenario, this concern for timely
reporting becomes more acute as emerging market economies face greater uncertainties as
they combat the ongoing global financial crisis. Using emerging country data, this paper
reports the findings of the impact of different levels of forms of company ownership – i.e.
ownership concentration, institutional ownership and foreign ownership – on the timeliness of
release of financial statement information of a sample of 198 Malaysian listed companies for
the 2007 financial year. Audit delay, which represents the number of days between the balance
sheet date and the date of the auditor’s report, is a variable that directly impacts on financial
reporting timeliness. Utilizing prior studies, we developed a model of audit delay, in which
audit delay act as a variable dependent on various company ownership variables and other
control variables. Using multivariate analysis, the findings provide evidence that ownership
concentration, institutional ownership and foreign ownership have some impact on audit
delay, and hence, the timeliness of release of financial statement information to the public.
Keywords: Company Ownership, Corporate Governance, Malaysian Listed Companies.
* Corresponding Authors
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1. Introduction
This study uses emerging country data to investigate whether different levels of forms of
company ownership has an effect on the timeliness with which audited financial statement
information is released to investors and the general public by examining the 2007 annual
reports of 198 non–financial and non–REIT companies listed on the Main Board of the Bursa
Malaysia.1
The IASB’s Framework for the Preparation and Presentation of Financial Statements
considers timeliness as an important qualitative characteristic of financial information. To be
relevant and useful, financial information must be provided to users within the time period in
which it is most likely to bear on their decisions. According to Healy and Palepu (2001), the
financial reporting process is a potentially important means by which management
communicates firm performance and governance to outside investors. Timeliness in the
release of financial statement information is recognized as an important characteristic to
investors and other users of accounting information (Zeghal, 1984) and is an important
determinant of their usefulness (Haw et al., 2006; Givoly and Palmon, 1982; Patell and
Wolfson, 1982).
Furthermore, Leventis et al. (2005) assert that in emerging market economies, timeliness in
reporting of otherwise non-publicly available financial statement information remains, for the
most part, the only means by which outside shareholders and investors keep themselves
informed of firm performance. In the present economic scenario, this concern for timely
reporting becomes more acute as emerging market economies face greater uncertainties as
they combat the ongoing global financial crisis. Therefore, as noted by Jaggi and Tsui (1999),
it will be beneficial to both international and domestic investors in understanding the causes of
delays in the release of audit reports in the context of an emerging economy.
2. Objectives of the Study
Companies often take a considerable length of time to release their financial statements as
these financial statements are required to be audited by external auditors. The auditing
literature suggests that the length of time taken by the auditor to complete the audit is often
determined by the extent and amount of audit work to be performed. This, in turn, is affected
by the auditor’s assessment of the acceptable audit risk associated with the audit engagement
(Arens et al., 2006, Bamber et al., 1993).2 According to Arens et al. (2006), when external
users place heavy reliance on the financial statements, it is appropriate that acceptable audit
risk be reduced by increasing the extent and amount of work to be performed in accumulating
planned evidence. Arens et al. (2006) further suggest that the distribution of a company’s
share ownership, i.e. the extent to which a company’s shares are widely held by several
investors or (closely held by a few investors) is a good indicator of the degree to which
1
REIT stands for Real Estate Investment Trust. In Malaysia, a REIT company is a trust fund that holds or invests in rental
properties. Its major income is rental income and it is required to distribute most of its profits as dividend to its holders.
2
Acceptable audit risk is a measure of the auditor’s willingness to accept that the financial statements may be materially
misstated after the audit is completed and an unqualified opinion has been issued.
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external users place heavy reliance or (little reliance) on its financial statements. Following
from this, an auditor associates a client with lower acceptable audit risk if the client’s shares
are more widely held by outside shareholders – for e.g., the presence of institutional and
foreign ownership – than if its shares are more closely held by a few insiders, i.e. ownership
concentration. As the effect of lowering the acceptable audit risk for a client increases the
extent and amount of audit work to be performed, this increases the length of time taken to
complete an audit of the client’s financial statements and subsequently to delay the timeliness
of its release.
By contrast, the corporate governance literature on institutional shareholder activism suggests
that institutional investors play an important role in monitoring and disciplining management
(see for e.g., Smith, 1996; Wahal, 1996; Karpoff et al., 1996; Carleton et al., 1998; Gillian and
Starks, 1998; Del Guercio and Hawkins, 1999; Gillian and Starks, 2000; Muhamad Sori and
Karbhari, 2005). Such a role arises due to the conflict of interests between managers and
shareholders (see Jensen and Meckling, 1976). According to Gillian and Starks (2000), the
primary emphasis of such activism has been to focus on the poorly performing firms in their
portfolio and to pressure the management of such firms for improved performance in order to
enhance shareholder value. Following from this, institutional investors can actively perform
their role and effectively monitor management by exerting pressure on management to
disseminate information, including audited financial statement information, on a timely basis.
We argue that companies will have the incentive to respond positively to those demands.
Also, prior research from the finance literature suggest that foreign investors are likely to
invest in firms for which information is more readily available on a timely basis in order to
overcome the asymmetric information problem that may exist between foreign and local
investors (see for e.g., Kang and Stulz, 1997; Portes and Rey, 1999; Coval and Moskowitz,
1999; Ahearne et al., 2000; and Jiang and Kim, 2004). Following from this, we argue that
companies with significant holding of their shares held by foreign investors will have the
incentive to provide more timely information to those investors.
Accordingly, the primary aim of our study is to investigate whether different levels of forms of
company ownership – institutional ownership and foreign ownership – has the effect of
delaying (as suggested by the auditing literature) or hastening (as suggested by the finance and
corporate governance literature) the release of audited financial statement information to
investors and the general public. Our secondary aim is to investigate whether ownership
concentration, a key characteristic common of listed companies in Malaysia, has an impact on
the timely release of audited financial statement information. In doing so, our study answers
the call made by Carslaw and Kaplan (1991) to conduct further research examining company
ownership in order to obtain an improved understanding of its effect on an important
determinant of reporting timeliness: audit delay. We hope to provide new evidence of that
understanding in the context of an emerging economy. Another reason for conducting this
study is that company ownership has not been considered by prior Malaysian studies as a
potential variable in understanding audit delay.
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3. Literature Review and Hypothesis Development
Literature Review
Defining Audit Delay. Consistent with previous studies, our study defines audit delay (AD) as
the period measured in number of days, between the financial statement date and the date of
the auditors’ report (for e.g., Newton and Ashton, 1989; Carslaw and Kaplan, 1991; Bamber et
al., 1993). This period denote the elapsed time between the close of a fiscal year and the end
of audit fieldwork (Kinney and McDaniel, 1993, p.135).
Two significant events directly affect AD. The first is the length of time taken by the client
organization to ‘close its books’ and prepare its draft un-audited financial statements ready for
the external audit. The second is the length of time taken by the external auditors to carry out
an audit and to complete their investigation of the draft un-audited financial statements before
issuing their opinion in the form of an auditors’ report addressed to the shareholders of the
client organization. Clearly, the length of time taken by the auditors to perform the audit has
an effect on the timeliness with which audited financial statements are released to investors
(Almosa and Alabbas, 2008; Wermert et al., 2000; and Bamber et al., 1993). Givoly and
Palmon (1982, p.491) assert that the length of the audit process is the single most important
determinant of the timeliness of the earnings announcement. Typically, most companies will
make their earnings announcements after the financial statements have been audited (Bamber
et al., 1993).
Determinants of Audit Delay (AD). The determinants of AD have been the subject of several
previous studies. The majority of these studies have been carried out in the context of
developed countries (for e.g., Lai and Cheuk, 2005; Knechel and Payne, 2001; Schwartz and
Soo, 1996; Ashton et al., 1989; Ashton et al., 1987; Newton and Ashton, 1989; Carslaw and
Kaplan, 1991; Davies and Whittred, 1980; and Dyer and McHugh, 1975) while a few have
been carried out using developing and emerging country data (for e.g., Karim et al., 2006;
Leventis et al., 2005; Ahmed, 2003; Owusu-Ansah, 2000; Jaggi and Tsui, 1999; Ng and Tai
1994). There are also a few emerging country studies specifically utilizing Malaysian data (for
e.g., Ahmad and Kamarudin, 2003; Naimi et al., 2006; Johari and Syed-Ahmad, 2007; and
Che-Ahmad and Abidin, 2008).
The provision of audit services embodies the client-auditor relationship. Not surprisingly,
these studies reveal that AD is potentially influenced by various client-related attributes (for
e.g., Ashton et al., 1989; Newton and Ashton, 1989; Bamber et al., 1993; Ettredge et al., 2000;
Jaggi and Tsui, 1999; Carslaw and Kaplan, 1991; Kinney and McDaniel, 1993; Courtis, 1976;
Dyer and McHugh, 1975) and auditor-related attributes (for e.g., Lai and Cheuk, 2005;
Schwartz and Soo, 1996; Ashton et al. 1987; Knechel and Payne, 2001; Williams and
Dirsmith, 1988). Therefore, to facilitate the rest of this review, the relationship between AD
and client attributes and between AD and auditor attributes are considered in turn.
Among client-related attributes, AD is found to be a decreasing function of company size
(Bamber et al., 1993; Carslaw and Kaplan, 1991; Ashton et al., 1989; Courtis, 1976; Dyer and
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McHugh, 1975). Also, companies in the finance industry have consistently shown to have
shorter AD (Ashton et al., 1989; Newton and Ashton, 1989; Courtis, 1976, Dyer and McHugh,
1975). However, companies with fiscal year-ends during busy periods are found to be
associated with longer AD (Garsombke, 1981; Dyer and McHugh, 1975). Also, Ashton et al.
(1987) found that companies with other than a December year-end have longer AD. In
contrast, Davies and Whittred (1980) fail to detect any significant association for the company
year-end variable in their study. AD is found to be a decreasing function of client ownership
concentration or company control (Bamber et al., 1993; Carslaw and Kaplan, 1991; Gilling,
1997) in contrast to Jaggi and Tsui (1999) who do not find family ownership or control to be
statistically significant in their Hong Kong study based on sample data collected from 393
companies for the years 1991 – 1993. Further, Carslaw and Kaplan’s (1991) study found
company control significant only for one of the two years they studied. Naimi et al. (2006)
find various audit committee attributes such as independence, financial literacy and number of
meetings held to be negatively associated with AD in their Malaysian study based on a sample
data collected from 628 companies for the year 2002. AD has been found to be positively
associated with the existence of extraordinary items (Ashton et al., 1989; Bamber et al. 1993)
in contrast to an earlier study by Davies and Whittred (1980) who found no significant
association. Generally, various forms of “bad news” have been found to be associated with
longer AD. Companies reporting net losses (Carslaw and Kaplan, 1991; Ashton et al., 1989;
Bamber et al., 1993), companies in financial distress or similar financial condition (Whittred
and Zimmer, 1984; Bamber et al., 1993; Jaggi and Tsui, 1999), companies receiving modified
opinions (Simnett et al., 1995; Ashton et al., 1989; Bamber et al., 1993) and qualified opinions
in the auditor’ reports (Soltani, 2002; Ashton et al., 1987; Whittred, 1980) have comparatively
longer AD. Also, Kinney and McDaniel (1993) find that companies with correction of
previously reported interim earnings have longer AD. Other client attributes found to have an
influence on AD include companies’ operational complexity, internal control quality and
listing status (Ashton et al., 1987). Debt proportions was found to be significantly associated
with longer AD (Carslaw and Kaplan, 1991) as was debt ratios (Garsombke, 1991) but, in
contrast, gearing ratios, in a Zimbabwean study by (Owusu-Ansah, 2000) are not found to be
significantly related to AD. Finally, Leventis et al. (2005) find that a shorter AD is associated
with paying premium audit fees.
Among auditor-related attributes, type of audit firm or audit firm size has been found to be
negatively associated with AD (Ahmed, 2003; Lawrence and Glover, 1998; Ashton et al.,
1989; Gilling, 1997). AD is also found to be negatively associated with the proportion of work
accomplished during interim audit (Ashton et al., 1987; Knechel and Payne, 2001) and of the
percentage of total audit hours related to partner and manager time (Knechel and Payne,
2001). On the other hand, AD is found to be positively associated with a structured audit
approach (Bamber et al., 1993; Newton and Ashton 1989) in contrast to William and Dirsmith
(1988) who observed that clients of structured audit firms experienced shorter delays or lags.
AD is also found to be positively associated with incremental audit effort and negatively
associated with the provision of non-audit services (Knechel and Payne, 2001).
Malaysian Studies on Audit Delay (AD). There is a paucity of published research on the
determinants of AD utilizing data of Malaysian listed companies. In one study, Che-Ahmad
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and Abidin (2008) find director shareholdings, total assets, number of subsidiaries, type of
audit firm, audit opinion and return on equity to be important determinants of AD for a sample
of 343 companies listed on the Bursa Malaysia in 1993. In another study, Ahmad and
Kamarudin (2003) utilizing a sample of 100 companies listed on the Bursa Malaysia during
the period 1996-2000, find that AD is significantly longer for companies that are from the
non-financial industry, receive other than unqualified audit opinions, have other than 31
December as the financial year end, are audited by non Big-5 audit firms, incur negative
earnings and have relatively higher debt proportions. Two unpublished studies are worthy of
mention. Naimi et al. (2006) find various audit committee attributes such as independence,
financial literacy and number of meetings held to be negatively associated with AD in their
Malaysian study based on a sample data collected from 628 companies for the year 2002.
Johari and Syed-Ahmad (2007) find number of subsidiaries, standard unqualified audit
opinion, presence of profit and size statistically significant in determining AD for a sample of
265 companies listed on Bursa Malaysia in 2004.
However, none of the above studies considered the company ownership variables that we
presently investigate in our study, in their models.
4. Hypothesis Development
Institutional and Foreign Ownership. As suggested by the auditing literature (see for e.g.,
Arens et al., 2006; Bamber et al., 1993), auditors associate companies with lower acceptable
audit risk when external users place heavy reliance on its audited financial statements. A good
indication of this is when the ownership of a company’s shares is more widely held by outside
shareholders. Since auditors lower acceptable audit risk by increasing the extent and amount
of work performed before completing the audit, such companies are therefore expected to
experience relatively longer audit delays. We argue that auditors take consideration of the
level of shareholding of a company’s shares held by outside institutional and foreign
shareholders when evaluating the extent to which external users place reliance on its audited
financial statements. Hence, our first, second and third hypotheses, expressed in the
alternative forms, are that:
H1: Companies with relatively higher level of institutional ownership of their shares
experience longer audit delays, ceteris paribus.
H2: Companies with relatively higher level of foreign ownership of their shares experience
longer audit delays, ceteris paribus.
H3: Companies with very significant foreign ownership of their shares experience longer
audit delays, ceteris paribus.
The institutional ownership variable (IOWN) is measured by the percentage of total shares
held by five of the largest Malaysian institutional investors, namely the Employees’ Provident
Fund, Permodalan Nasional Bhd, Lembaga Tabung Angkatan Tentera, Lembaga Tabung Haji
and Social Security Organisation, relative to the total number of shares in the company. The
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
foreign ownership variable (FOWN) is measured by the percentage of total shares held by
foreign investors relative to the total number of shares in the company. We introduce a second
foreign ownership variable, SIGFOWN, to identify companies having significant foreign
ownership presence. The variable is assigned a score of ‘1’ if the percentage of total shares
held by foreign investors relative to the number of shares in the company exceed 20 percent;
otherwise ‘0’.
Ownership Concentration. Conversely, auditors associate companies with higher acceptable
audit risk when external users place little reliance on its audited financial statements. A good
indication of this is when the ownership of a company’s shares is more closely and tightly held
by a few inside shareholders. Since higher acceptable audit risk allows the auditor to reduce
the extent and amount of work performed before completing the audit, such companies are
therefore expected to experience relatively shorter audit delays. Hence, our fourth hypothesis,
expressed in the alternative form, is that:
H4: Companies with concentration of ownership experience shorter audit delays, ceteris
paribus.
The concentration of ownership variable (OCON) is measured as the percentage of shares held
by the single largest shareholder relative to the total number of shares in the company.
5. Methodology
Sample Selection and Data Collection
The sample for this study is drawn from companies listed on the Bursa Malaysia at the
beginning of 2006. After excluding companies from the financial services and REITS industry
classifications, we randomly selected 200 companies from the other companies in the
remaining industry classifications. Two companies were dropped from the original sample due
to missing data. The 2007 annual reports of the remaining 198 companies were then retrieved
from Bursa Malaysia’s website.
We extracted the following data from the annual reports. The date on the balance sheet is
identified as the financial statement date; whereas the date above which the audit partner signs
the auditors’ report is identified as the date of the auditors’ report. The two dates are used to
calculate audit delay. The auditors’ report is also used to identify the type of audit firm and
whether the client firm has subsidiaries which are not audited by the reporting external
auditor. Data such as annual revenues, total debts, total assets, earnings per share, non-audit
fees, size of audit committee, and data on share ownership are extracted from the consolidated
income statements, consolidated balance sheets, notes to the financial statements, statements
of corporate governance as well as from other additional compliance information given in
these annual reports.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Main Model
Multiple regression models are the most frequent methods applied by prior AD studies (for
e.g., Lai and Cheuk, 2005; Ashton et al., 1987; Bamber et al., 1993; and Carslaw and Kaplan,
1991). Borrowing a theoretical framework from these studies, the following AD model using
cross-sectional multiple regression analysis is proposed:
AD = α + β1 (YE) + β2 (AUD) + β3 (AF) + β4 (NAF) + β5 (TD/TA) + β6 (EPS) + β7
(REV) + β8 (SOA) + β9 (ACSIZE) + β10 (OCON) + β11 (IOWN) + β12 (FOWN) + β13
(SIGFOWN) + ε,
where (predicted sign in brackets):
Dependent Variable:
AD
=
Control Variables:
YE (+)
=
AUD (-)
=
AF (+)
=
NAF (-)
=
TD/TA (+)
=
EPS (-)
REV (-)
SOA (+)
=
=
=
ACSIZE (-)
=
Audit delay, measured in days, calculated from the financial statement
year-end date to the date of the auditors’ report,
Busy audit period; companies with a December financial year-end
assigned a ‘1’; otherwise ‘0’.
Auditor type; companies audited by Big 4 auditors assigned ‘1’;
otherwise ‘0’.
Audit fees; surrogate for audit quality/audit effort/audit hours spent on
the audit.
Absolute amount of non-audit fees paid to reporting auditors;
knowledge spill-over promotes earlier completion of audit.
Ratio of total debts to total assets; a measure of a company’s leverage
and risk.
Earnings per share; a measure of profitability and “good news”.
Annual revenues; a proxy for company size.
Number of subsidiaries audited by other than the principal auditor; an
alternative measure of audit reporting complexity.
Size of the audit committee; a proxy for good corporate governance
practice in place.
Hypothesized Variables:
OCON (-)
= Ownership concentration; audit work reduction as external users place
little reliance on audited financial statements.
IOWN (+)
= Institutional ownership; audit work increment as external users place
heavy reliance on audited financial statements.
FOWN (+)
= Foreign ownership; audit work increment as external users place heavy
reliance on audited financial statements.
SIGFOWN (+)
= Significant presence of foreign ownership; audit work increment as
external users place heavy reliance on audited financial statements.
Assigned ‘1’ if foreign ownership of total shares exceeds 20%;
otherwise ‘0’.
As shown above, our AD model employs a total of thirteen (nine control and four
hypothesized) independent variables.
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Results and Discussion
Table 1 exhibits the descriptive statistics for all 198 companies:
Table 1: Descriptive Statistics (N=198)
Variable
AD (days)
YE
AUD
AF (RM’ million)
NAF (RM’ million)
TD/TA
Variable
Minimum
Maximum
Mean
37
0.005586
0
0.009118
486
10.4000
4
1.783196
98.81
60%
70%
.33155899
0.14
0.41677859
Minimum
Maximum
Mean
-370.4
0.0000
0
3
4.12
0.00
0.00
-
247.0
23,320.400
122
7
99.16
21.64
87.13
-
16.382
950.25969492
5.29
3.86
30.1913
1.1650
7.8911
10%
EPS (sen)
REV (RM’ million)
SOA
ACSIZE
OCON (percent shares)
IOWN (percent shares)
FOWN (percent shares)
SIGFOWN
As shown in Table 1 above, the mean audit delay for the companies in our sample was 99 days
with a minimum delay of 37 days. Sixty percent of the companies in our sample have a
December year-end while seventy percent of these companies are audited by audit firms from
the Big-4.
The mean shares held by the single largest shareholder, as measured by OCON, is 30 per cent
of the total shares of a company, for the companies in our sample. The mean shares held by
domestic institutional shareholders, IOWN, were approximately 1.2 per cent; while the mean
foreign ownership of shares, FOWN, was approximately 7.9 per cent. Approximately 20
companies or 10 per cent of the companies in our sample have shares which are significantly
held by foreign investors, SIGFOWN, in which they hold more than 20% of the total shares of
those companies.
A correlation matrix is shown in Table 2:
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
AD
1
YE
-0.04
1
AUD
-0.12
0.03
1
AF
-0.11
-0.04
0.11
1
NAF
-0.08
-0.07
0.13
0.66
1
0.15
0.00
-0.11
0.07
0.11
1
EPS
-0.14
-0.05
0.11
0.17
0.15
-0.29
1
REV
-0.19
-0.06
0.14
0.76
0.62
0.13
0.27
SOA
0.05
-0.04
-0.13
0.20
0.25
0.11
0.11
0.11
1
ACSIZE
0.08
0.02
0.03
0.18
0.07
-0.01
0.04
0.17
-0.08
1
OCON
-0.27
0.18
0.26
0.02
-0.06
-0.09
0.07
0.09
-0.12
-0.06
1
IOWN
-0.25
0.05
0.21
0.45
0.33
0.03
0.21
0.52
0.04
0.19
0.18
1
FOWN
-0.07
0.03
0.24
0.08
0.13
-0.03
0.09
0.07
0.00
0.05
0.03
0.26
1
SIGFOWN
-0.12
-0.03
0.22
0.01
0.00
-0.03
0.03
-0.02
-0.05
0.01
0.03
0.22
0.83
TD/TA
SIGFOWN
FOWN
IOWN
OCON
ACSIZE
SOA
REV
EPS
TD/TA
NAF
AF
AUD
YE
AD
Table 2: Correlation Matrix
1
The preliminary bivariate results of Table 2 above show that AD is negatively associated to
our hypothesized variables: OCON, IOWN, FOWN and SIGFOWN. Only the correlation
coefficients between AD and OCON (r = -0.27) and between AD and IOWN (r = -0.25) are
significant at the 0.01 level (2-tailed).
Overall, the results of Table 2 above suggest that except for a few inter-relationships where the
correlation coefficients (r) exceeded 0.50, correlation between most of the independent
variables is not a major problem. However, to be certain, we tested for the existence of
multicollinearity using VIF (variance inflation factor), tolerance, condition indexes and
variance proportion measures to establish that our regression model is not plagued with
multicollinearity.
Table 3 presents the multivariate results using multiple regression for our sample companies:
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Table 3: Multiple Regression (N=198)
Variable
&
Predicted Sign
YE (+)
AUD (-)
AF (+)
NAF (-)
TD/TA (+)
EPS (-)
REV (-)
SOA (+)
ACSIZE (-)
OCON (-)
IOWN (+)
FOWN (+)
SIGFOWN (+)
Regression
Coefficient
VIF
-1.445
1.188
2.439
-1.700
22.637
-.016
-.002
.083
4.398
-.434
-1.942
.490
-27.438
1.066
1.199
2.858
2.073
1.201
1.271
3.077
1.162
1.090
1.186
1.591
3.602
3.542
t-value
-.286
.206
.577
-.264
2.019
-.265
-1.447
.390
1.641
-2.775
-2.003
1.422
-1.828
p
.775
.837
.565
.792
.045 **
.791
.149
.697
.103
.006 ***
.047 **
.157
.069 *
Summary Statistics:
Intercept
88.075
R2
0.173
2
Adjusted R
0.115
F-test
2.961 ***
*, **, *** = Significant at the 10%, 5% and 1% level respectively using a two tailed test.
The regression results for our model of audit delay are shown in Table 3 above. The F-test (Ftest = 2.961, p < 0.001) indicates that the model is sufficiently robust. The adjusted R-squared
of 11.5% suggest that the model has some reasonable explanatory power. The VIF values
(none exceeds 10.000) suggest that multicollinearity is not an issue in interpreting the
regression results.
Only eight of the thirteen independent variables (AF, NAF, TD/TA, EPS, REV, SOA, OCON
and FOWN) showed association with AD in the predicted directions. Of these TD/TA is
significant at the 5% level and OCON is highly significant at the 1% level. Of the four
variables which showed association with AD, opposite to the predicted directions, SIGFOWN
is marginally significant at the 10% level and IOWN is significant at the 5% level. Consistent
with a prior Malaysian study conducted by Ahmad and Kamarudin (2003) our study finds that
companies with relatively higher proportion of debt are subject to longer AD, in contrast to
Che-Ahmad and Abidin (2008), who did not find debt proportion to be significant. Carslaw
and Kaplan (1991) suggested that such companies have higher risk exposure and are more
likely to face bankruptcy and therefore likely to “…raise additional concerns in the auditors’
minds that the financial statements may be less reliable than normal”, (p.25). In contrast to
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
prior studies on AD, the results of our study did not find YE, AUD, AF, NAF, EPS, REV,
SOA and ACSIZE to be significant.
In the remainder of this section we devote our discussion to the main variables of interest in
our study: OCON, IOWN, FOWN and SIGFOWN. As hypothesized, and consistent with
Bamber et al. (1993), Carslaw and Kaplan (1991) and Gilling (1997), we find AD to be a
decreasing function of OCON (p < 0.001). The bivariate results from Table 2 above provide
further support for this relationship. Our results provide strong evidence that companies with
ownership concentration have relatively shorter AD. Often, the number of external users
placing reliance on the audited financial statements of these closely-held companies is
negligible (Arens et al., 2006). Moreover, internal users are those who normally exercise
control over these companies; therefore have no need of the audited financial statement
information since they already have easy access to such information (Nicholls and Ahmed,
1995; Adhikari and Tondkar, 1992). Hence, auditors conduct a less than detailed examination of
the books and records and an earlier completion of the audit.
Contrary to our hypothesis, we find AD to be a decreasing function of IOWN (p < 0.05). The
bivariate results from Table 2 above provide further support for this relationship. We offer two
possible explanations. The first, require an understanding of the state of the Asian (including
Malaysian) corporate landscape. Muhamad Sori and Karbhari (2005) noted that a key
characteristic of the ownership of listed companies in emerging Asian markets has been the
high degree of ownership concentration as opposed to wider institutional ownership.
Muhamad Sori and Karbhari (2005) note further that institutional investors are found to be
generally passive, preferring exit over voice. Moreover, according to Haniffa and Cooke
(2002), in the case of Malaysia, a significant number of these companies are family-owned
and they exercise little or no formal separation between ownership and managerial control.
Under that scenario, institutional investors are unlikely to obtain any benefit from placing
reliance on the audited information; hence, auditors might have little or no incentive to
conduct a detailed and comprehensive audit. Secondly, the corporate governance literature on
institutional shareholder activism suggests that institutional investors play an important role in
monitoring and disciplining management (see for e.g., Smith, 1996; Wahal, 1996; Karpoff et
al., 1996; Carleton et al., 1998; Gillian and Starks, 1998; Del Guercio and Hawkins, 1999;
Gillian and Starks, 2000; Muhamad Sori and Karbhari, 2005). In Malaysia, this role has been
assumed by an organization called the Minority Shareholder Watchdog Group (MSWG),
established in 2002, and sponsored by five large Malaysian institutional investors, namely the
Employees’ Provident Fund, Permodalan Nasional Bhd, Lembaga Tabung Angkatan Tentera,
Lembaga Tabung Haji and the Social Security Organisation (Muhamad Sori and Karbhari,
2005). Institutional investors can actively perform their role and effectively monitor
management by exerting pressure on management to disseminate information, including
audited financial statement information, on a timely basis. We suggest that companies, and
their auditors, will have the incentive to respond positively to those requests in order to remain
in the ‘good books’ and to avoid adverse media and public attention. The auditors have
additional incentives to reduce damage to their reputation by supporting this group of
institutional investors to promote corporate governance ‘best practice’ in the marketplace.
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Although our study finds an association between AD and FOWN in the hypothesized
direction, it is not statistically significant. However, for the companies in our sample with
significant foreign ownership presence (i.e. > 20% of total shares) we obtain results contrary
to our expectation; we find AD to be a decreasing function of SIGFOWN though the
relationship is only marginally significant (p < 0.1). Prior finance studies have found that
foreign investors tend to limit their overseas investments to well-known, large and profitable
companies (see Kang and Stulz, 1997; Dahlquist and Robertsson, 2001; Lin and Shiu, 2003;
and Chiang and Kuo, 2008), whilst prior auditing studies on AD have consistently found AD
to be a decreasing function of company size and profitability (for e.g., Bamber et al., 1993;
Carslaw, 1991; Ashton et al., 1989). Carslaw and Kaplan (1991) suggest that larger profitable
companies may be able to exert greater pressures on the auditor to start and complete the audit
on a timely basis to convey the good news (p.23). In addition, they suggest that larger
companies are more efficient and are more likely to have stronger control systems which
reflect on their ease of audit (p.29). Taken together, these studies provide a possible
explanation for the observed relationship between AD and SIGFOWN above. Unfortunately,
other results from our study do not show any statistically significant relationships between
foreign ownership, company size, profitability and a shorter audit delay to support that
explanation. We find a more plausible explanation from the corporate finance literature (see
for e.g., Suto (2003)) which suggests that foreign participation in emerging capital markets
contributes to disciplining corporate management of domestic firms; as international investors
are more concerned about corporate value and thus demand more information than local
investors. Obviously, for the information to be useful and relevant it has to be made available
on a timely basis.
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Muhammet ŞAHİN
Faculty of Economics and Administrative Sciences
Gümüşhane University, Turkey
[email protected]
CRESTFALLENNESS OF NATIONS:
AN INQUIRY ON REASONS OF THE GLOBAL FINANCIAL CRISIS
Abstract
The aim of this study is to investigate the reasons of the 2008 Global Financial Crisis. This
study contains the effects of the economic policies which applied after the 1973 Oil Crisis.
Methodologically, historical process and macroeconomic data will be used. While examining
the 2008 Financial Crisis, the decays at the home loans are mentioned and the negative
influances of the subprime credits are emphasized. But it is known that several factors are
effected on the occuring in an economic crisis, not only a factor. Thus, it can be said that
income distribution which gradually worsening, increasing of the speculative transactions,
rising the war economies and such various factors caused the formation of the 2008 Global
Financial Crisis as well as deteriorations of the housing markets.
Keywords: Economic Crisis, Income Inequality, Speculative Activities.
1. Introduction
2008 Global Financial Crisis also named as Mortgage crisis has spreaded everwhere in the
globe by starting from the U.S.A and affected the economy of both developing and developed
countries in a negative way. Therefore, heavy load has occurred on the national economy with
the crisis, increased unemployment figures and decreased economic growth figures.
The Global Crisis occurence in 2008 may have caused to a mistake in perception. It’a as
follows: the occurence of financial crisis as a result of disruptions in residence market thanks
to subprime loans given to people not having any power to buy something has showed
Mortgage markets as a reason of this crisis. Whereas, infrastructure of the crisis has lasted
much older and the one has originated from profound and complicated reasons. The crises
being a a reality that the world economy has experienced for centuries have come to a global
state with the increase of interaction between world economies and a state of that it has
covered the whole world with the effect of development in communication.
While crises have depended on real variables such as production, consumption, saving, etc.,
the speculative movements arising from money and capital market have begun more
determinent in the crises over the years. Inflated prices artificially, movable and (or)
immovable properties rising above their values has had a crucial role in the occurence of new
period crises.
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However, it is not possible to say that only factor in occurence of 2009 global crisis is the
speculative transactions. War economies peaking in the interwar and cold war period after
industrial revolution took an important role in the emergence of global crisis, too. Because war
economies required huge financial resources, cutting down on the fields such as education,
health, social policies and infrastructural was imminent and a great burden on national budget,
too.
It can be said that unjust income distribution as a result of unstable development is other factor
in emergence of global economical problems. Because, not being shared justly of produced
wealthness by community has been a cause of less consumption than production. That has
openned the way to both national and global crises by yol açarak economical problems
originated from the lack of ready Money demand.
The reasons and etc. above is not only these. It may be stated that many factors like these have
a role in emergence of global financial crisis. Nonetheless, those problems seem as the main
factors which break out the crisis.
2. The Emergence of Global Financial Crisis
The starting point of global financial crisis is the housing sector. Mortgage loans have
increased dramatically in parallel with low interest rates and upturn in house prices of the
U.S.A markets since 2006 and the consumers have entered in propensity to consume much
more than their incomes. The situation has reversed since the last quarter, 2006 and the house
stock that could not sell has reached the highest level in the years after 1993. The consumers
have begun to have difficulty in payment with being closed of cheap loan period and
increasing of changeable rational of interest, the number of those subjected to sequestration
has increased and the stated sequestrations have nearly been the trigger of global crisis
(Ataman Erdonmez, 2009, pp.85-88).
The problems starting with mortgaged home loan have turned into an liquidity crisis since the
middle of 2007, the bankruptcies have occurred in the banks experiencing liquidity problems
bacause of difficulties had in returns of mortgage loans. Subprime loans given to low-income
groups who do not have purchase power and being high-risk elements with these
specifications have an important role in being had difficulties in returns of loan. These loans
putting pressure on takers in company with interest increase and distributed in the period when
interest rates were low gave rise to slowdown in the sectors dependent on housing particularly
building and insurance and this discussed slowdown has deepened with spreading to other
macro data (Agcakaya and Yavuz, 2008, pp.8-15).
At the beginning, the global crisis has affected financial market. On the other hand, it has
spreaded to real sector, too and branched out from the develop countries (USA, Western
Europe and Japon) to developing countries (Iceland, Hungary, Russia, South Korea, Thailand,
the Republic of South Africa and etc.) (TOBB, 2008). With the crisis, the cost of sourcing for
the developing countries markets increased and the escapes from their markets have begun.
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The crisis has increased the borrowing cost of emerging market countries. The stock yield of
the companies in East and Central Europe counries and Latin America ones incurred large
losses (Çetinkaya et al., 2008, pp.226-231).
3. The Accumulated Problems being The Source of Crisis
It is possible to mention that there are various reasons creating 2008 economic depression
named as Global Financial Crisis and having influence on a substantial part of the globe,
especially the developed western economies. These factors which can also be associated with
the economic cycle after 1973 oil crisis can be discussed with the following four titlesincluding but not limited to these-.
3.1 The Process resulting in recession: Not shared wealth
Market-oriented policies put into practice after 1973 oil crisis have caused an apparent
disruption in global income distribution and the welfare difference between the developed
counties and less-developed countires has been opened continuously. Thus, while the income
of the most rich %20 in the world was thirty-onefold of the income of the most poor %20 in
1965, this rate rose sixtyfold in 1990 (Somel, 2002, pp.197-202). The number of people living
under the poverty threshold worlwide has been 1.089 billions since 2001 (DPT, 2007, pp.711).
Figure 1: The Global Gini Coefficient Value (1950-1998)
Source: Çiftci, 2004, pp.163-164
When the figure 1 showing the global income distribution after The World War IIis checked
out, the breakage afterward 1973 is seen clearly. So, the global distribution being more fair
than the years carried out in the period subsequent to the war and called as Keynesian Welfare
State practices began to retrogress post 1973 Oil Crisis.
The applications implemented by reason of getting over the crisis had an effect on the global
income distribution at the breakage postwar in 1973. Besides the applications-such as easing
of the law protecting to worker safety, the reduction of the power of union, the spread of parttime and informal working applications- effecting labour-market, the public policies reducing
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fair deals contrary to increasing public expenditures and financial and economy policies being
a kind of regressive tax applications lay behind the distruption in the distribution balance
(Ghai, 1995, pp.55-61).
Steep turn, transformation experienced in economic policy post oil-crisis increased the poverty
in less-developed countries and deterioration in distribution became more serious. Therefore,
the number of the earners below 2 dollars a day rose from 294 millions to 556 millions in subSaharan African countries and from 799 millions to 1 billion 92 millions in South Asian
countries between the years of 1981-2005. As for the number of earners below 2 dollars a day,
it has changed as 2 billions 564 millions worldwide since 2005 (World Bank, 2008, pp.10-13).
On the one hand, the applications named as Neo-Liberal doctrine coming up after 1973 crisis
1973 opened the gap between developed countries and developing ones. On the other hand,
the balance of distribution in themselves of developed countries deterioriated, too. When the
advanced economies that emerged Global Financial Crisis were analyzed, it was seen that
income distribution of these countries within their own was about to retrogress. For example,
Gini coefficient average of OECD Organization consisting of advanced economies mostly
rose from 0,293 to 0,310 till from 1970s to 2000. (OECD, 2006, p.219). Similarly, Gini
coefficient value being 0,399 in 1967 in the USA where has been an important role in global
economy rose to 0,456 level in 2001 (U.S Census Bureau, 28.07.2009).
It is possible to handle the effect of retrogression of both national and global distribution
principles on 2008 economic crisis with the insufficient effective demand approach. The
insufficient effective demand approach that John M. Keynes used for the purpose of
expressing 1923 depression is in response to the approach that The Classical Liberal doctrine
depends and envisages that there will be full employement in all conditions (Keynes, 1959,
pp.313-320).
The inefficient effective demand issue also defended by Karl Marx in 19.century before
Keynes is related to decline of buyers’ purchasing power. According to this approach, John
Baptiste Say’s “Mahrec Law” is not valid. Labourers consume less than their products and
most of their productions are interiorized as “residual value” by many employers.
Consequently, as an over-production to be occured in an environment where wages supress is
not be able to be consumed in the market, disproportion between amount of production and
amount of consumption appears definitely and a substantial portion of production goods can
not be consumed (Yılmaz et al., 2005, pp.78-88).
When the above mentioned two situations (the disruption of global distribution balance and
concordantly insufficient effective demand) are examined alltogether, the dimension of glabalscale recession is well understood. The inefficient effective demand problem had in the USA
being the center of the crisis and other developed countries has affected the booming
ecenomies such as India, Russia and China that has derived its economic growth from the
activities carried out with Western World. That’s to say, decoupling hypothesis brought
forward by some economics environments isn’t seemed valid (Egilmez, 2008).
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Figure 2: Average Economic Growth Rate of The Global Economy(%)
Source: IMF, 2009, p.169
The growth performance of World Economy approximately for the last twenty years is
showed in Figure 2. When the figure is analyzed, it can be understood that adverse effect 2008
crisis caused affected the whole world economy. So, inefficient effective demand which both
developed countries (DC) and developing countries experienced and being able to be
associated with deteriorated distribution balance has brought about world-wide economic
shrinkage.
3.2 Speculative Bubble and the Crisis in the Environment
While 2008 crisis causing a negative impact on world economy is examined, the importance
of global-wide speculative transactions is supposed to stress, too. The speculation called as
“buying or selling process in the hope of price alteration in future rather than the expected
utility related to the use of good” by Nicholas Kaldor give rise to irrational manners
depending on mass psychology in the economic entities and correspondingly may be turned
into buying or selling spree (Mazgit, 2007, pp.8-11).
The first experience known as related with transactions being the subject of speculation is
“Tulipmania” experienced in Holland in 17th century. Upturn in tulip prices between the
years-1634-1637- turned a speculative bubble after a while, yet this unreal price rise came to
the conclusion with price decline rapidly in February, 1637 (Garber, 2000, pp.61-64). After
tulipmania in Holland, one more speculative bubble named as “South Sea Bubble” emerged in
18th century of England and enormous rise of “South Sea Bubble” stocks eventuated in
collapse in 1720 (Okan, 2003, pp.51-55).
Nevertheless, the most important speculative bubble burst in respect to impacts on economy
history is a big crunch happenned in New York Stock Exchange in 1929. The speculative
transactions in New York Stock Exchange being a center of welfare explosion, production and
consumption rise and great leap in America economy during 1920s and parallelly artificial
inflated share values cultimated in collapse in 1929 autumn and that collapse made out the
Great Depression that is the first great crisis of the history (Parker, 2009, pp.30-44).
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The spreculative transactions often encountered in the historical process increasingly
continued in consequence of revolutions in communication and information technologies after
1980. The financial centers such as New York, Tokyo, Zurich, Frankfurt, London and Hong
Kong during 1980s when globalization fact has accelerated have become “super market” and
begun to control a large part of stock market movements worldwide (Tozum, 2002, pp.159161).
In parallel with financial mobility in today’s world, there are substantial changes in the
structure of economic crises. While economic crises in advance of speed progress in financial
markets was dependent on real variables such as technical development, rate of profit, supply
or demand much more, financial variables such as Exchange, banking transactions and hot
money flows after recent increases in financial markets have started to be determinative of
emerging financial economic crises and the crises beginning at financial markets have begun
to spread real sector gradually, too (Boratav, 2004, pp.107-110).
The financial transactions to be also mentioned as virtual economy can give cause for
economic entities to be irrational. As required by “law of demand” being a basic approach in
economics, the demand for a good rising its price is needed to decline. Nonetheless, the
bubbles arising as a result of speculative transactions are not in accordance with this reality.
By the time the products such as stock Exchange and bond are accepted as a good one by one,
price rise in these papers being rational cause decline of demand. However, the increase of
demand being parallel with price rise emerging on these papers is an indicator of that the
transaction is irrational, not rational (Eğilmez, 2009, pp.98-102).
Economical applications carried out post 1973 crisis caused an important change in the
characteristic of capital movements after second World War and the capital movements came
a state of more speculative. These speculative transactions named as hot money not only
contribute to capital accumulation but also affected some national economies in a negative
way. Hot Money flows originating with big amounts caused foreign trade deficit to increase
by creating problems in foreign exhange markets of the countries where they entered into
(Berksoy, 2009).
The above mentioned effects of speculative transactions make themselves felt especially in
less-developed or developing country markets. In the developing countries having carried out
a series of reforms especially liberalization of capital movements since the beginning of
1980s, grand economic crises happenned during 1990s. These crises resulting from capital
markets and financial transactions liberalized largely and occuring in Mexico in 1994 and in
Southeast Asia in 1997 gave birth to deep economical recession in the countries such as
Mexico, Turkey, Argentina, South Korea, Thailand and Malaysia (Güloğlu and Altunoğlu,
2002).
3.3 Economic Warfare, Ecocide, Energy and Food Bottle-necks
Wars have as a long history almost as human history and caused large-scale disasters through
the history. The first World War being the first full scale war of the history broke out owing
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to colonial activities becoming intense after 1873 economic crisis and lasting (Ferro, 2002,
p.132-133) during 19th century (Dennis, 1973, pp.610-617).
In fact, there wasn’t any sitution to be associated the war till from 1870s to the beginning of
1910s in Europe in contrast to cutthrout competition continuing in colonials. There wasn’t a
big scale hot conflict between European countries. But, the rise in economic warfare keeped
the war potential in Europe alive (Hobsbawm, 2005, pp.326-353). Economic interests and
expansionist policies hiding behind national interest discourses provoked war expenditures of
big economies and started to the process going to first World War (Beaund, 2003, pp.173183).
The first World War broke out in this atmosphare and the important economies of Continental
Europe such as Germany, Russia, France, Austro-Hungarian Empire ,Italy came out of the war
by declining. (Broadberry and Harrison, 2005: p.26). After this effect which the first World
War created on dominant economies, the World War II broke out in 1939 and the economic
warfare activities continued by rising during both preparation process to the war and thewar
(Durand, 1999, pp.103-106).
Adversary cold war period post World War II caused armament race to keep continually and
the rise in defence spendings continued. With the inclusion of great powers such as
England,France and China to this armament race beginning after 1945 between USA and
USSR, the economic warfare reached up a global scale. It was hoped past cold war that
armament race would end. However, substantial amount of military spendings continued
(Granet, 1999, pp.332-341).
Table 1: Five Countries Having the highest Depense Spending
Sorting
Defense Spending(Billion $)
The Percentage
Spending (%)
in
World
Per Capita Defense Spending($)
Defense Spendingı/GDP(%)
1999-2008 Change(%)
Defense
USA
China
France
England
Russia
World
1
2
3
4
5
607
84,9
65,7
65,3
58,6
41,5
5,8
4,5
4,5
4
1967
63
1061
1070
413
217
4
2
2,3
2,4
3,5
2,4
66,5
194
3,5
20,7
173
44,7
1464
Reference: Perlo-Freeman, Perdomo, Sköns and Stalenheim, 2009, p.182
Figure 2 shows the highest five defence spending of the world and these mentioned countries’
portion in the world defence spendings.When the table is analyzed,it is understood that these
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five countries,especially USA,have spent substantial amount for defense.(%60 of defense
spendings in world).It will be able to be well-understood that total defence spending has
reached 1,464 trillion dollars worldwide since 2008 and the point economic warfare reached
when taken the amount of defense expenditures’ increase between the years of 1999-2008 in
proportion to % 44,7 into account.
War economies are accepted as anti-recession and deferring crisis by some people. According
to this; big scale wars can provide deferring crisis or getting rid of it. The accuracy of this can
be accepted in the short or medium term. However , in the long term economic imbalance and
poverty will increase.The thing going to be is that economic imbalance and poverty will
totally increase. Because the rising of spending on defense means the decreasing of spending
on education, health, infrastructure, social security etc… The final effect of this decrease is
going to be felt on the whole society (Stiglitz, 2003).
Beside the increasing war economies, ecologic balances corrupting fast also pose a threat for
the world. Nowadays , because of the environmental destruction; glaciers are melting so fast ,
air pollution, concrete pollution, noise pollution, and metal pollution are increasing and forests
are disappearing. Now the climate changing, overstepping water and air pollution , chemical
accidents and transportation of dangerous wastes subjects concern whole humanity and require
a solution above nationalities (Baykal and Baykal, 2008, pp.3-7).
Increasing of the environmental destruction and becoming common of the war economies
prevent the use of global energy sources effectively and increase expenditures on economies.
The risk of battle going on in areas having important reserves with respect to petrol – like
Middle East – constitutes oppression on petrol prices. The last example of this is increasing of
the petrol prices dated from the Second Gulf War in 2003 (Lemieux , 2005).
The increase on petrol prices, besides creating cost pressure in every part of economy, because
of increasing demand for biofuel, leads an extra increase on the prices of agricultural crops
like sugarcane, green soybean and corn. So, in 2007 – 2008 term when the increase on petrol
prices culminated, soybean (mainly used in biomasses) prices increased % 36, 19 and the price
of corn also increased % 33,98. Also in the same term, the average price increase of whole
agricultural products reached % 39,64 (UNCTAD, 2009).
Every cost constructive effects of destruction which happened in the environment and
expansion arised in war economies, chiefly the food products, affects economies of
underdeveloped and developing countries as much as developed countries (Dağdemir, 2003,
pp. 27-29). When coming up the dimension of hunger problem and the increase on food prices
, the anxiety for progress of hunger problem emerges. However, FAO (International Food and
Agriculture Organization) expressed that only 30 million dollars a year are needed in order to
come to an end the global hunger problem (FAO, 2008). If it is considered that 1, 464 trillion
are left for only defence expenses, tragicomic state of the problem could be seen more clear.
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3.4 Chronical Macro Problems: Low Growth in the Center and High Unemployment
Even Global economic disaster that erupted in 2008 in ABD created negative effects on macro
variables like unemployment and economic growth, economic performance in the period after
1973 wasn’t beter than Welfare Government Period. Welfare Government Period expressing
the duration between 1945 and 1973 had been named as the Golden Age of Capitalism and the
largest expansion phase of free market economy became at that period.
Although the whole age had been named as the Golden Age, problems had already begun to
arise before petrol crisis in 1973. Towards 1970’s while the growth speed was decreasing, the
rate of profitability decreased in main economies like the USA, England and France before the
crisis in 1973 and there also lived declines in the growth rate of industrial production towards
1970s (Başkaya, 2004, pp. 139-146).
Low growth and high unemployment terms also protected their existences after 1980’s in free
market economies that began to come through problems before 1973 petrol crisis and this
situation have become chronic until today.Struggle with the inflation became successful in
West economies applying contractionary economic policies in order to compensate
inflationary pressures because of 1973 petrol crisis, however high unemployment and low
growth couldn’t be prevented (Kazgan, 2005, pp.94-98).
Figure 3: Economic Performance of seven Developed Economies post Oil crisis
Light-Colored Bar: Unemployment Rate
High-Colored Bar: Economic Growth Rate
High-Colored Curve: Inflation Rate
Source: Acar ve Şahin, 2009, p.91
The figure 3 reflects the average economic performance of seven developed (D-7) economies
after 1970. As seen in the figure, high growth and low unemployment levels before oil crisis
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seem remote nowadays. The low growth and high unemployment in these countries being
good at struggling with inflation which only oil criss caused have become cronic and this
situation has continued until today.
Emphasizing to 2008 crisis doesn’t mean that developed economies had time without any
problem until that time. Western economies encountered with various problems fundamentally
after 1973, too. Developed market economies also had financial problems in 1980s and 1990s.
The stock market collapse in the USA in 1987 ended up with the bankrupt of many American
Saving and Loan Association. Rapid reduction of real estate price in Japan through 1990s
brought a lot of banks and insurance companies into verge of bankruptcy. As for Germany, it
struggled with heavy laden resulting from union of west and east (Allen, 2003, pp.208-221).
In spite of that developed economies of Western had these financial problems, it can be stated
that crises’ happening in near countries during 1990s-transposition of crisis risk to near)
contributed not to occur a large scale crisis between 1973 and 2008. For example, “Asian
Miracle” describing the miracle which Southeast Asian Countries (South Korea, Malaysia,
Singapure, Thailand, Hong Kong, etc) performed after 1980s eventuated in 1997 crisis and
appeared a large scale decline in Asia economies (Öksüz, 2001, pp.43-50). Similarly, many
apparent problems emerged in this important economy of Latin America thanks to the crisis
occurred in Argentina in 2001 (Evirgen, 2004).
Table 2: Growth Performance of Economies Around in 1990s (%)
Turkey
South Korea
Singapure
Hong Kong
Tailand
Malaysia
Mexico
Arjentina
Brazil
Chile
1993 1994 1995 1996 1997
7,7
8,1
6,9
7,5
-4,7
5,5
8,3
8,9
6,8
5
12,7 11,4
8
7,5
8,4
6,1
5,4
3,9
4,5
5
8,4
9
9,3
5,9
-1,4
9,9
9,2
9,8
10
7,3
2
4,4
5,2
6,8
-6,2
6,3
5,8
-2,8
5,5
8,1
4,9
5,9
4,2
2,7
3,3
7
5,7 10,6 7,4
7,4
1998
3,1
-6,7
0,3
-5,3
-10,8
-7,4
4,9
3,8
0,2
3,9
1999 2000
7,2
-4,7
10,9 8,8
5,9
9,9
3,1 10,5
4,2
4,3
5,8
8,5
3,8
6,9
-3,4 -0,5
0,8
4,2
5,4
-1,1
Reference: IMF, 2001, pp.166-175
Economic growth performance of developing economies named as around economies that
showed during 1990s is given in the data in table 1. As understood from the table, the near
countries generally having a good growth performance faced with severe shrinkage from time
to time because of the crises they had. While Asian economies were shrinking seriously right
after 1997 crisis (in 1998), the economy of Mexico from Latin America countries shrank
rapidly post 1994 crisis. As for Tukey, she affected from the crises in 1990s and encountered
with economic shrinkage occasionally in spite of not being an Asia or Latin America country
with her specific position.
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It can be said that crises’ occurence in emerging capitalist countries named as near and after
all central countries’ not affecting from that are related to different solution suggestions
suggested for economy policies. The policies such as openness, privatization and liberization
suggested to around economies made these economies unprotected against global fluctuation
and the government interferences in these countries were minimized at the recommendation of
central economies. Nonetheless, when central economies making suggestion to around
economies encountered with an economical or a financial problems, thet did not refrain from
public interventions (Berksoy, 2008).
4. Conclusion and Suggestions
2008 economic crisis also named as Global Financial Crisis has affected many economies,
especially the USA, in a negative way. The mentioned economic crisis has been called as
Mortgage Crisis and associated to the problems resulting from Subprime Loans.
However, there are many more specific reasons of the crisis than this. Before anything else,
the welfare rise in the world hasn’t been distributed fairly and the clear injustice of distribution
has appeared between both countries and social public in the countries.
Even if this emerged social injustice seems at first appearance like a situation breaking social
peace, it causes negative results on economical activities and “insufficient effective demand”
problem appeared owing to decline of society’s purchase power. Moreover, this problem
doesn’t remain limited only in country. An insufficient effeftive demand problem emerging
especially in developed countries has impeded to emerging countries planning their
development efforts according to economical activities generally with developed countries.
Other main factor in emergence of global crisis is the rises of speculative transactions.
Economic crises have lost this characteristic gradually even if they result from real variables at
the beginnig and in the crises, the effects of speculative activities have increased. This kind of
activities causing a sort of bandwagon effect(herd psychology) not only in developed countries
but also developing countries has caused economic rationality to disappear and that invited
crises. In addition to these, hot Money movements directing towards emerging countries have
affected financial balances of these countries and damaged them to develop and progress.
Economy warfare and increasing defense spendings can be accepted as other crucial reasons
of economic crisis. Even if economic warfare is accepted as a fact deferring to recession and
preventing economic crises by some people, the appearance of long-term economic and social
problems will be unavoidable. That’s to say, because defense spendings require huge and
substantial financial resources, economization and restrictions in education, health and social
policy will be compulsion. That situation is to damage social balances for a long-term. Also, it
will affect economic balances in a bad way. Furthermore, as the rise in economic warfare is to
result ecocide, effective distribution of the resorces won’t occur and therefore the increases to
be come up in production cost will bring problems for economy.
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The listed factors above are accepted and the main ones in accurance of global crisis.
Absolutely, just these aren’t factor for the accunance of crisis. However,the effects of these
factors on global crisis seems much more.The global crisis shows that a global economic
system not contributing to social peace, damaging distribution balances, aiming at economic
warfare rather than science and humanity, depending its development and growth on
speculative movements by giving up productiveness and disregarding developing countries
will often exposure and suffer crisis and have economical problems.Then, the following
policies can be suggested to decrease the risk of one more crisis of the global economy
•
•
•
•
Economy policies should protect social and global balances, the whole economic
system ought not to be only for profit. Protection of social balances is compulsory
not only for the protection of social peace but also keeping economic stabilisation.
Speculative transactions should be restrained, the policies in the direction of
resources heading towards speculative transactions to be directed to productive
fields should be put into practice. Because, sudden and large-scale hot Money
movements making financial balances of countries upside down damage to
economies and make crises inevitable.
Economy warfare harms to social balances and economy. That’s why, scientific
studies for education, health, social programs, development and peace should be
utilized. The fair use of the earth’s resources for a peaceful purpose will bring both
developed and developing countries in higher welfare level.
Justlike in 1990s, trying to export economic crisis from central country to around
countries will be an interim remedy. In stead of this approach not to be of service
rather than deferring crisis, emerging countries having structural problems ought to
be provided support by developed countries and solidarity and cooperation
atmosphere between developed and developing countries should be dominant.
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Piero BENAZZO
Sweden
[email protected]
CONFOUNDING IN THE INTERACTION OF THE GLOBAL FINANCIAL CRISIS
WITH THE REAL SECTOR: ECONOMIC FUNDAMENTALS AND EFFECT OF
REDISTRIBUTION ON THE KEYNESIAN MULTIPLIER
Abstract
The hypothesis of this paper is that the current crisis has its roots in the fundamentals of the
real economy and that this has caused the financial crisis. The analysis considers variables
hidden by the aggregation used in macroeconomics, which would account for sources of
confounding concealing the role of the real sector economy in this financial crisis. The main
variables considered are: the inequality in the part of income above the subsistence level; the
aggregation of inequality and total factor productivity; the outflow of total factor productivity
growth from delocalised factories; the bias in the statistical data due to financial bubbles.
Their analysis brings about an inverse correlation of inequality with effective demand and
with growth, and one clearing of controversy on the Keynesian multiplier: its thrust would be
the inequality decrease. Excessive increase in inequality would then have had a leading role in
decreasing effective demand while inequality, concentrating economic entitlements in affluent
hands, was increasing the propensity to save. This has generated asset prices appreciated
excessively beyond the intrinsic present values of their possible future cash flows, resulting in
financial bubbles and eventually a paradox of thrift dynamic: the financial crisis.
Keywords: Inequality, Effective demand, Keynesian multiplier.
Acknowledgement: I thank Johan Giesecke for suggestions on the idea of confounding, my
wife Federica for checks on the text and all support, all those from whom I got inspiration.
Any errors are mine.
In Benazzo (2009), a paradigm is presented in which competition for meritocracy is good for
TFP growth and cooperation for keeping as low inequality as possible is good for the outlet
markets. In other words, given a situation in which the economy is at full potential output,
TFP growth is maximised in the long run on the condition that its benefices are equally shared
by both capital and labour (Paolo Sylos Labini, 1981), and throughout all occupational groups.
Capital remuneration and wages of all occupational groups should keep growing at the same
yearly percentage as that of TFP growth. This analysis in Benazzo (2009) is recalled
synthesised in the first part of this article, as an analysis base for further argumentations. The
mentioned condition has been unattended in the last decades, such that capital remuneration
and top executives remuneration have grown more that TFP growth, while other occupational
groups remuneration have grown less. A number of statistics show an increase in real income
also for lower and middle income occupational groups. However the value of time should also
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be accounted for. In large part of households, time worked has increased, either by both
husband and wife working, or by decreasing holidays. Time foregone is generally considered
good for the wife that works, however the best condition would be that this allows the husband
to stay more at home (Krugman, 2007). Time foregone is generally wealth foregone. Another
factor to consider is the inflation of the subsistence sector expected by applying Amartya
Sen’s (1981) analysis of famines due to inequality increase. Even if the real income has
increased a little or stayed constant, after adjustment for time, inequality enlarges the
subsistence sector cost in the economy (Benazzo, 2009). This means that there are less
economic entitlements left in order to secure consumption of goods and services beyond
subsistence and wealth decreases even beyond figures of real income.
Before discussing the recent financial market bubbles the base of the analysis is on the three
main sources of confounding that would hide a clear correlation between inequality and
effective demand (Benazzo, 2009). These are recalled here. As a first source of counfounding,
inequality has a different effect on the subsistence sector and the modern industrial sector.
This latter includes all the rest, such as leisure food, leisure clothes, additional housing,
appliances, holidays, recreation, etc. It is here called “Industrial” in the sense that was absent
in traditional subsistence economies, “modern” as industrialization touches also the traditional
subsistence sector production, which remains “traditional”. A rise in inequality creates a
dynamic of inflation of the subsistence sector in relation to the modern industrial sector,
within the economy. Subsistence is assumed to be the same in general for all economic agents,
and to change due to factors which are quite independent from a person’s efforts or skills, such
as the climate of the area (mountain, desert, ...), the metabolism of the person concerning food
and reaction to cold or hot temperature. Inequality should therefore be measured on the
modern industrial sector only because inequality has anyway to be ensured, and because
subsistence can be assumed an equality consumption in itself. A second source of confounding
concerns the presence of action on effective demand both from the part of TFP growth and
from the part of an increase in inequality in opposite directions. This requires the control of
one of the two while analysing the effect of the other on effective demand. A third source of
confounding is in the open economy with delocalization, where the demand side remains
local, while the supply side production is delocalised. Inequality acts therefore locally and
TFP growth is imported from the delocalised plants. This should be taken into account, as well
as the fact that delocalization tend to give the fruits of TFP growth to the parent headquarters
in the developed country, leaving the developing country as if that TFP growth remained
absent as before. Altogether these sources of confounding require to be controlled in order to
avoid that a variable, i.e. called inequality, is measured on an inappropriate aggregate (first),
without controlling for another variable in the closed economy, i.e. TFP growth domestically
(second), or for another variable in the open economy, i.e. TFP growth imported from
delocalised factories (third). Disregarding this is generating an improper variable called
inequality which actually includes in itself dynamics of the equality of the subsistence sector
and dynamics of domestic and imported-delocalised TPF growth, generating a confounding
variable rather than considering inequality.
A limit situation is that of an extremely unequal economy as opposed to a completely equal
economy. Both economies are considered closed and both have the same overall total of
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economic entitlements. Entitlements are considered those that allow securing both in the
private and public sector goods and services. The subsistence sector is the same in both
economies, which have the same population. What remains of economic entitlements, are
distributed completely equally in one country and at the opposite limit are possessed by only
one household in the other. These entitlements are defined as wealth entitlements (Benazzo,
2009). An example can be done on effective demand in the two situations. The demand of
subsistence in both is the same. A population of three million household is considered, with
three persons per household on average. In the country with perfectly equal distribution of
wealth entitlements above subsistence, the population would by something like four million
cars, two millions home cinema, one million sport equipment, and infrastructures, such as
seven hundred kilometres cycle lanes in cities of one million inhabitants, buses that pass at
less than three hundred metres from the door for 95% of the city population. For the other
economy, the only household that has all the amount of wealth entitlements in an exaggerated
concentration, the effective demand would be for some one hundred cars, fifty home cinema,
ten sport equipment, and practically absent infrastructures, with cycle lanes only for their
usual path in the cities the household visits normally, and without a public transportation
infrastructure.
The analysis of how to exit from this situation of the extremely unequal economy is analysed.
Without considering (re)distribution, only one possible way is available, consisting in
increasing the TFP in the subsistence sector (Benazzo, 2009). The other one is to change
distribution by increasing remuneration of the occupational groups, or by redistribution
through taxes. From such analysis base, the redistribution is analysed in more detail. The only
wealthy household could be taxed by the state at a very high level and the proceedings be used
to put up public sector enterprises that provide public sector goods and services. The
exaggeratedly wealthy affluent household would forego most part of its wealth. Another
alternative would be that the same taxed entitlements of that household are taken by the state
and provided in equal shares to all households. Eventually this could lead to the situation of
the other economy in which all had equal wealth entitlements.
Equal entitlements for all households sound very much in line with the ideal of Communism.
Effective demand on the demand side is discussed here rather than growth. When growth is
considered, supply side enters into the picture with the necessity to foster meritocracy in order
to maximise TFP growth (Benazzo, 2009). How meritocracy requires incentives and rewards
is also a question of cultural attitude. Its regional variability tends to hide constant patterns of
correlation between inequality and effective demand.
The discussion of which use of taxes is better, either the state owning the enterprises, or the
citizens receiving entitlements and putting up enterprises is beyond the objective of this paper.
The other case is the exaggeratedly affluent household puts up factories and pays employees
wages above subsistence in a way as to sell all the productions.
In all three cases there is time friction. The state needs to find entrepreneurs, management
teams and put up factories and employ. The households receiving entitlements would need to
compete in order to find entrepreneurs, put up an expansion of the credit system in order to
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
collect funds for the entrepreneurs. The only affluent household would have to behave as the
state.
This framework is used to read the last decades dynamics, starting from the increase in
inequality that has occurred. The benefits of increased productivity have gone in larger part to
capital remuneration, to top executives, and to media personalities.
As inequality has increased, TFP growth results stems as having had more and more difficulty
in decreasing prices in order to counterbalance the decrease in effective demand due to the
increase in inequality. A number of factors are individuated as having slowed the process such
that inequality has piled up.
A factor is the delocalization in developing countries. This has allowed to decrease further
prices of products then imported in developed countries, increasing the developed country real
income. The effect on inequality has been to increase it, as decrease in prices has been for all
the different levels of wealth, from the extremely affluent to the limitedly wealthy. As
headlines as well as statistics do report, the middle class has been the occupational group that
has suffered the most (Krugman, 2007).
Another factor is the use of the conventional mainstream paradigm for which the economy can
be governed looking only at the supply side: if the economy is slacking then it is sufficient to
put up factories, in order to decrease unemployment and to produce goods and services. The
markets would then adjust prices so that if demand is lagging, prices would deflate and
demand would be reinstated. Keynesian economics is supposed to work in much a similar way
when the public sector puts up factories and decreases unemployment, with the additional
issue of the distortions to the market efficient functioning. The paradigm here considered
argues that the demand side is important too. Valuations of companies share values have been
based on the net present value of the future cash flows. The question is how the future cash
flows are estimated. In a paradigm in which the economy can be governed exclusively from
the supply side, the operators, basing on the mainstream conventional wisdom would have
projected into the future the current trends in cash flows estimating that they would have
continued in the future, as the reports on data from the economies were leading to consider in
such directions. This positive outlook would have led more and more economic agent to invest
in the financial markets. The forecast of future cash flows, in the light of the paradigm
discussed here, where the demand side matters, stems as incorrect.
There would have been contrasting forces. On the demand side, the fundamentals of
perspectives of outlet markets for enterprises were deteriorating, on the other side positive
supply side forecasts were fostering to invest in the share market. These forecasts were
enhanced by two main factors. One was that profits were positive, and the reason for this in
the last decades has also been because the benefices from TFP growth were going mainly to
remunerate capital; and also top executives. Profits therefore may be considered as taken in
two main ways, either from the present in a sustainable future way, or taken running down one
or some economic thrust forces. Both are seen to have been at work, together mixed in the
profit maximisation. The part of the profits exceeding the rate of TFP growth, results as
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
unsustainable. Similarly, the part of top executive remunerations that was increasing faster
than TFP growth results as unsustainable. The unsustainable part of the profits in the long run
was set to reverse and subtract value to the sustainable part, in the form of lost market shares.
Financial markets valuations have left the two together as this is coherent with the mainstream
conventional paradigm.
In a period like the current one, when there are problems in finding consumers to buy the
goods and services, the conventional mainstream economics would say that deflation would
resolve, by reinstating demand. This contrasts with another mainstream economic principle of
the economies of scale. When demand is lagging there is idle capacity. The companies would
continue to function as fixed costs are sunk costs, however to continue to be profitable they
necessitate to decrease costs just when decreased sales decrease economies of scale. This can
be sustained in the short term, however the dynamic persists in the long term this may entail
that there is lack of funds to provide for amortization.
The current mainstream economics may well make things worse, deepening the crisis, if
actions are taken that increase inequality, as in the inequality-decrease paradigm this
corresponds to reverse the multiplier. When the way out of the crisis is considered to be the
decrease of wages, in order to decrease prices, this may well increase inequality in the
economy, decreasing therefore demand in a larger amount than the decrease in wages would
allow reinstating. Eventually price may need to be lower than variable costs. The option of
turning an economy even more export-led can work as long as there are other economies that
are import –led. As the crisis is generalised, such a proceeding to look for competitiveness in
exports would be short fetched, as much more as many countries are trying that way out of the
crisis.
The risk to take the wrong route is also present when the last decades mainstream economics
is put aside to go back to Keynesian economics, but mixing it with the mainstream
deregulation paradigm of last decades. The result is composed of Keynesian expenditure
brought about implementing tax cuts, with the idea that when economic agents would have
more money in their pockets, they would spend it. The issue about cutting taxes is that the
redistributive action of progressive taxation is decreased, therefore increasing inequality. The
paradigm here discussed indicates that inequality decrease is a general multiplier of effective
demand, while Keynesian expenditure is analysed as working only when it is performed while
decreasing inequalities. As such, the Keynesian multiplier is a special case of the general
inequality decrease multiplier (Benazzo, 2009). In a way, the inequality decrease multiplier is
a criterion for grading priorities on long term policies in the current crisis in order to resolve it.
The best policies would be to decrease inequalities, considering the dynamics of the closed
and open economy. Keynesian expenditure performed while decreasing inequality spring as
one optimal option. Keynesian expenditure performed with tax cuts and in general while
decreasing inequality stems as the worst option. Keynesian economics would indicate that the
deficit so created is going to be covered by the multiplying effect. The inequality decrease
multiplier indicates instead that budget deficit performed by increasing inequalities would
decrease the multiplier instead of increasing it, deepening the crisis even more. In comparison,
the maintaining of the last decades mainstream approach to economics to minimize deficit
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emerges as a better option as it would avoid slipping even faster into the crisis by budget
deficit with increasing inequalities.
The inequality decrease multiplier has, among its characteristics, such as attributing a simpler
dynamic to unemployment, the characteristic to give an explanation of why Keynesian
economics is thought to function only in case of big recessions or depressions, while being
neutralised by inflation in other cases (Benazzo, 2009). The analysis indicates the rationale in
disregarding in which direction inequality has been progressing, in less dramatic downturns,
when Keynesian expenditure had been brought about. Certainly in case of big recessions and
depressions there is a large unemployment and its absorption would decrease inequalities,
especially in those countries where unemployment benefits are limited or very scarce. In
economies more in line with the unemployment benefits standards of the European ones and in
less dramatic recessions, if unemployed are employed back with Keynesian expenditure by
paying them the same amount of money as the benefits they were receiving as unemployed, or
very similar, then the effect of decreasing inequality is quite limited and may well be easily
neutralised by other measures that increase inequality.
While the unsustainability of profit was gradually increasing within the domestic economy, in
the light of the inequality decrease multiplier, the same concerns on the increase of
inequalities and of remuneration of capital at a faster rate than the rate of TFP growth apply to
the international economy. Delocalization has dramatised such same dynamics, with many
delocalised companies profiting in even larger part of the TFP growth and concentrating it in
the remuneration of capital or of domestic and national expatriated top executives (and few
ranks below).
The hiding of these dynamics behind data aggregations brings to overvaluation of future
prospects of cash flows, generating subsequent financial market bubbles. Such bubbles were
reinforcing the perception that share market values were set to progress further, and this
expectation was self fulfilling by means of placements of savings in such instruments.
Another side of the dynamics may be described as composed by large amounts of money
available for savings. This is coherent with the large amount of innovative financial
instruments created in the last decades.
Here also the paradigm of the decrease in inequality multiplier provides an explanation which
fits with the events. As inequality has increased and was counterbalanced by TFP growth,
wealth has kept concentrating in few hands. These households were consuming already all that
they could, or almost. The propensity to save has therefore increased as a lesser part of the
entitlements were set to be spent. This has generated additional money available for
investment, sustainable on the demand side until the decreased propensity to consume was
counterbalanced by TFP growth. This dynamic diminishes the entitlements used to consume in
the modern industrial sector; it increases their part used for the inflating subsistence sector.
The TFP growth needed to counterbalance that necessitates to be accelerating in order to
counteract on a decreasing set of available entitlements to be used in the modern industrial
sector.
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This creates a decoupling: savings increase, while the outlet market perspectives of enterprises
remain first constant, until TFP growth counterbalances the effects of inequality increase on
effective demand, then deteriorate as TFP growth becomes insufficient. This composes the
financial markets bubbles occurred in sequence more and less recently. In this paradigm of
inequality decrease multiplier, interest rates and prices are insufficient to determine an
equilibrium with full employment and maximisation towards full potential output. An
additional condition is required, as indicated by Paolo Sylos Labini (1981), extended also to
the distribution of the remuneration among occupational groups. This condition of distributed
growth of remunerations at the same pace of TFP growth, as seen in this paradigm (Benazzo,
2009), requires a social contract obtained by cooperative decision processes. Cooperation is
quite more challenging for devising theories and models with respect to competition. In this
perspective, interest rates and prices are conditions for clearing the markets, necessary
however insufficient for reaching full employment and maximising output.
On the other side, interest rates and prices, as they always need to clear the markets, would
need to adapt in the medium and long term to the fundamentals in order to clear the markets.
In a situation in which effective demand is insufficient, in the long run clearing markets need
to adapt the situation by inflation. With inflation, the same previous amount of money buys
fewer goods and services, in coherence with decreased effective demand. How can inflation
settle in with a situation of decreasing effective demand, which is meant to decrease prices
with deflation?
One way is composed by the dynamic of the subsistence sector in presence of increasing
inequalities, where inflation settles in the subsistence sector, while deflation settles in the
modern industrial sector. The result is that the entitlements left for ensuring wealth
consumption of goods and services, decreases, decreasing the wealth in the economy. This has
been examined in Benazzo (2009), discussing about the introduction of the Euro in Italy.
Inflation in goods and services related to the subsistence sector has been estimated at
something around 15 percent, while official statistics were measuring an overall inflation
around 3 percent, meaning that the weight of the subsistence sector has been enlarging in the
whole economy.
On another side, the financial bubble itself keeps entitlements away from effective demand.
When the placements of savings are felt insecure because there is a feeling about gloomy
perspectives for future cash flows, then the bubble bursts, and the bubble goes somewhere
else. In the end of the 1990s and beginning of 2000s, the financial turmoil has started fostering
diversion of savings from the stock markets to the housing market. The housing market refers
to the subsistence sector. Even if the house needed as shelter for subsistence may be a very
small one, a larger house may be felt a better place, and the increasing demand in the housing
market has lead to the expectation that housing was a good position where to place savings.
This has lead to inflation in the subsistence sector that has taken an increasing part of the
economy, while leaving fewer entitlements to be enforced in the modern industrial sector.
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Incidentally, there is an effect of TFP growth of this shift of placements of savings from the
stock market to the housing market. The housing market has less space for TFP growth than
other sectors. This entails that the possibilities of TFP growth to counterbalance the effect of
increasing inequality on effective demand decrease, exacerbating the recession dynamic.
Concerning the interest rate, when it is taken alone, it has a limit in the sense that it is the cost
of capital. Investment decisions depend on the difference between the return on capital and the
cost on capital. In a paradigm in which the supply side is sufficient and there is always
sufficient demand in the outlet market, then the return on capital can be considered related to
each market and quite constant in time, and therefore the decisions of investment would
depend just on the cost, the real interest rate. In the paradigm in which there is a inequality
decrease multiplier, when inequality increases the outlet markets shrink and the return on
investment decreases. The real interest rate in itself becomes part of the decision of the
entrepreneurs. It still needs to clear the markets; however the investment decisions depend also
on the prospect in the demand side in the long run.
Such a dynamic composes a functioning in which when inequality increases there is a
decoupling between supply side and demand side, and a decoupling between savings and
investments. As prices and interest rates necessarily clear the markets, this decoupling remains
hidden within a financial market bubble, while it builds up, due to conventional paradigm
expectations and to the dynamics involved. When the financial bubble bursts, the cycle has
built up an involution spiral difficult to counteract. The tumbling of the financial market
valuations operates the working of the paradox of thrift, in which an increase in savings brings
to a decrease in output which decreases the value of savings. In the conventional paradigm this
is a paradox, because it is in contrast with the paradigm that an increase in savings increases
output. In the paradigm of the inequality decrease multiplier, the paradox of thrift, rather than
a paradox is the normal functioning of the economy when inequality increases. In a paradigm
in which inequality is outside the picture, expectations would make the dynamic work as
financial bubbles that build up and burst passing to other placements, until possibilities where
to transfer bubbles exhaust.
The financial bubbles and the current financial crisis are therefore explained in the inequality
decrease multiplier paradigm as due to economic fundamentals rather than financial market
malfunctioning. The financial market is seen as having experienced an influx of availability of
funds much higher than the requests of financing from the enterprises. It is seen as having
adapted its functioning in order to find ways for matching savings received with borrowings,
and the easy lending for the housing market has been a step in that direction, for employing a
big availability of funds. On the side of statistical data, the decoupling between hidden
fundamentals that bring towards a crisis and apparent market valuations entails that the
recorded statistical data about the economies in such situations are biased, overestimated in
relation to the hidden fundamentals. This overestimation thus needs to be accounted for in
empirical analysis. The policies implications with excessive inequality are that the benefices
of TFP growth should go to labour and, within occupational groups, to lower wages
occupational groups, either before taxes or after taxes, in order to decrease inequalities. In an
international economy setting based on competition, this may start by decreasing top
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executives’ and media personalities’ remunerations, before and/or after tax. This equates as an
increase in the remuneration of the less wealthy. The two measures are considered equivalent
as they both decrease inequality. Upon this, inflation/deflation would do the rest as in
mainstream supply side economics, however with the analysed different dynamics involved.
Concluding Remarks
There is a decoupling which is individuated between the supply and the demand side when
inequality increases. As its implications, prices and interest rate become insufficient to bring
to an equilibrium that reaches full employment and full potential output. There is a further
condition for a maximising equilibrium to be maintained: that capital remuneration and
remunerations throughout all occupational groups grow at the same rate of TFP growth in the
long run. If the economy is away from the equilibrium of full employment and output
maximisation such condition would bring the economy near the maximising equilibrium only
in the very long run. If the disequilibrium is due to inequality that has increased too much,
then there would need to be opposite unbalanced counterbalancing dynamics on the shares of
TFP growth for reaching maximum output or there would need to be counterbalancing
redistribution. The last decades mainstream paradigm has concentrated the attention on the
supply side, without viewing the increasing inequalities as a problem. This would have led
expectation in the financial markets to interpret all of the increase in cash flows of the
companies as sustainable, while the inequality decrease multiplier paradigm subdivides it in
two chunks, part sustainable as due to TFP growth, part unsustainable as due to inequalities
increase that run down the TFP growth benefices in the long run. There would have been as
such a decoupling between expectations and statistics showing positive prospects, and the
fundamentals of the economy that were deteriorating towards a turning point and then an
involution of recessive cycle. The financial crisis would as such be the consequence of the
structural problems in the fundamentals of the economy, rather than vice versa. The policies
implications are that inequality needs to decrease; that Keynesian expenditure is effective
when it decreases inequality. If it increases inequality the crisis is expected to worsen.
This paper analyses economic dynamics using logical propositions. Its validity is reasoned on
conciliating certain puzzles between empirical data and controversial parts of mainstream
theories and paradigms. Its validity could be put under direct empirical verification by
applying its working dynamics to empirical data, by devising adapted theories and models,
where empirical data are available. Were empirical data are yet to be available, studies can be
performed on how and when certain data are anyway obtainable through indirect methods.
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Ons EL GAIED
Department of Economics
University of Sousse, Tunisia
[email protected]
Chaker ALOUI
Department of accounting and Finance
University of Tunis-El Manar, Tunisia
Ousama BEN SALHA
International Finance Group-TUNISIA
University of Tunis-El Manar, Tunisia
DID THE SECURITIZATION CONTRIBUTE TO THE RELEASE OF THE
SUBPRIME CRISIS? EMPIRICAL INVESTIGATION FOR AMERICAN BANKS
Abstract
The central assumption of this paper is that the securitization, the act of converting illiquid
loans into liquid securities, has largely contributed to an excess of risk taken by American
banks on their subprime credits. Empirical investigation, conducted on 6775 American banks
located in 50 states between 2003 and 2007, confirm this assumption. In addition, we find that
banks which securitize are also those which have an increasing rate of profitability and a
higher risk rating. Moreover, this crisis seems to have a macroeconomic explanation: the fall
of the house price index since 2006 seems to deteriorate the situation of the US banks.
Keywords: Subprime crisis, Panel logistic regression, Securitization.
1. Introduction
The financial history was marked in the last decades by a succession of financial crises. Black
Monday of Wall Street (1987), the Asian financial crisis (1997) and, recently, the subprime
crisis seem to have a periodic frequency. According to the 2009 Global Financial Stability
report, the amount of the American assets for the whole financial institutions during the period
between 2007 and 2010 may exceed 2,7 billions of dollars against 2,2 billions of dollars
expected in January 2009. According to the International Monetary Fund, the global amount
of the loosed credits in the world is estimated at approximately 4 billions of dollars, of which
two-thirds are at the load of the banks, and the remainder comes from the insurance
companies, hedge funds and other institutions. Since August 2006, various actions were
undertaken by the central banks for the rescue of the financial markets. This has been
materialized by liquidity injections for several times. Indeed, the amount of the injections of
the European Central Bank exceeded the sum of 500 billion Euros. The bank of England also,
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injected until April 2008, 63 billion Euros for the repurchase of real estate credits. Some
economists and professionals argued that the propagation of the subprime crisis was supported
by the vehicle of securitization. In fact, the amount of banks securitized credits raised
substantially from 1268,6 billions of dollars in January 2000 to about 2523,4 billion dollars in
2008, an increase of about 100%.
The aim of this paper is to test empirically the role of the securitization in the release of the
recent subprime crisis. In fact, we will check the assumption of the excessive risk-taking by
bank firms in loans granting. This high risk is supported by the possibility for American banks
to transform their credits into negotiable evidences of indebtedness using the precess of
securitization.
After an overview of the theoretical and empirical literature on the banking and Subprime
crisis (section 2), this article gives an outline of some stylized facts related to the release of the
Subprime crisis in the United States (section 3). Then an empirical analysis is proposed, based
on statistical and econometric analysis conducted on a sample of 6775 American banks
between 2003 and 2007 (section 4). The empirical results are presented in section 5. Section 6
concludes.
2. Existing Literature
The securitization is the process of taking an illiquid asset, or group of assets, and through
financial engineering, transforming them into a security. A typical example of securitization is
the Mortgage Backed Security (MBS), which is a type of Asset Backed Security (ABS) that is
secured by a collection of mortgages.
A mortgage loan is a standard debt contract between the borrower (the property purchaser) and
the lender (the financial institution which grants the credit). The credit is guaranteed by the
bought of the property if the borrowers do not pay its loan. All the mortgages have not the
same credit risk. We distinguish three types of loans: Prime, Subprime and Alt-A Mortgage.
The main difference which exists between the prime and the Subprime Mortgage (Mortgage
loan at the high risk) consists in the profile of the borrower risk. The Subprime loans are
granted to a high-risk population. In fact, the bankers select the applications for the credit by
constructing a measurement scale about the borrower risk based on:
‐ Their previous relation with the bank (payment of old loans, ratio of debt to income).
- The credibility of the documentation provided by the borrower to check his income.
- The “credit score” of the borrower. This one is initially given by a “FICO score”. It
is a score given by The Fair Isaac and Company (FICO) and secondly, by the
amount of the requested loan.
Therefore, according to the definition accepted by the majority of banks, a mortgage loan is
classified in the Subprime category, if it is granted to a borrower having a FICO score below
620 points. The FICO score, calculated by Fair, Isaac & Co, ranges between 300 and 850
points. The higher score is, the more the chance to have a credit under better conditions
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(interest rate, LTV, term of payment…) is high. A FICO score higher than 720 is considered
as excellent and makes it possible to qualify the borrower as a “premium”. When the borrower
has a credit score ranging between 720 and 620, the loan is considered as Alt-A Mortgage.
The process of securitization is working as follows: First, a regulated and authorized financial
institution originates numerous mortgages, which are secured against the various properties
the mortgagors purchase. Then, all of the individual mortgages are grouped together into a
mortgage pool, which is held in trust as the collateral for an MBS. Mortgage Backed
Securities are largely issued by aggregators such as Fannie Mae or Freddie Mac1. A new
security is created, backed up by the claims against the mortgagors' assets. This security can
be sold to participants in the secondary mortgage market. This market is extremely large,
providing a significant amount of liquidity to the group of mortgages, which otherwise would
have been quite illiquid on their own. The MBS are subdivided to the CMBS (Commercial
Mortgage-Backed Securities) and the RMBS (Residential Mortgage-Backed Securities).
The securitization has several advantages for banks. Initially, it represents a new funding
source. Thus, securitization allows transforming illiquid portfolio to a liquid one. Moreover,
the risk of loss on the portfolio value will be transferred to the investors. For example, if the
portfolio ultimately has bad quality and if flows generated are insufficient, the investor will
support the financial loss. However, it is generally rare that the totality of the risk is
transmitted to the investors. For the case of the US banks, the grantor preserves the “first risk”
on the portfolio2. Securitization also makes it possible to manage the balance sheet by
controlling the swelling of this one. Indeed, by refinancing the portfolio of credit, the grantor
can increase its activity or generate new credits while maintaining its balance sheet on a
controlled level. Finally, securitization can also be considered as an arbitration instrument. An
increase of the value could be released either by buying a diversified bonds portfolio
transmitted by companies, or by transferring bonds with a SPC (Special Purpose Company)
which finances the purchase by a securitized bond emission. The differential could thus yield
an increase of the value.
González-Hermosillo (1999) advances that the moral hazard may occur when banks take
excessive risks by granting loans to very lucrative conditions in the short run, but for which
prospects for long run refunding are reduced. This behavior is also motivated by the fact that
bank supervisors expect that possible losses will be absorbed by a third part, like the
government through rescue operations or the international financial organizations. As
confirmed by Miotti and Plihon (2001), the vulnerability of banks would not be due only to
the moral hazard, there would be also a speculative behaviour adopted by domestic banks
which are motivated by financial liberalization and the transformation of the banking
environment. In fact, according to these authors, financial liberalization increases competition
between foreign and domestic banks and thus decreases the profit of the latter from
intermediation activities. At the same time, in the post-liberalisation period, companies had the
1
Definition given by Investopedia, a Forbes Digital Company.
Generally, the most risky bonds are repurchased by the grantor in order to support the first risk of non payment of its
portfolio: these bonds are called subordinate bonds.
2
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possibility to be financed directly on financial markets, this will decrease banks benefits which
will be encouraged to have some speculative operations. The two authors had a Keynesian’s
inspiration. It is located in line with the analysis developed by Kindleberger (1989). According
to this author, the majority of financial crisis in the financial history had three phases:
displacement, euphoria and distress. Displacement is an event which modifies the behaviours
and expectations of the market intervenors. The euphoria is the phase which follows
displacement; it is characterised by a period of blooming. Finally, the distress is the phase of
panic and bankruptcies. It results from the positions taken by the agents following an
excessive risk-taking.
This analysis can also be applied to the recent financial subprime crisis. We consider that
securitization (period of displacement) as a new tool of financing on the market motivated the
American banks to grant high-risk loans and to evaluate badly the quality of the borrowers.
Then, the American banks saw their profit increasing. This period can be considered as the
euphoria period. The excessive risk taken by banks led, with the collapse of the real estate
market, to a financial distress and failures: the stage of distress. The development of the
financial markets and the emergence of financial innovations (derivative products, credits
securitization) give the banks the opportunity to satisfy their preference for the liquidity. In
other words, banks made profitable placements which do not have a direct relationship with
the financing of the productive economy, unlike credits intended to finance investments. These
speculative operations have contributed to the development of the financial capital (or fictive),
which is opposed to the industrial capital invested in the productive chain.
At the same time, the majority of works related to the analysis of banking crisis have been
concentrated on the implications of the macroeconomic conditions. We mention among them,
Demirguç-Kunt and Detragiache (1998) and Glick and Hutchison (2001)3. Arteta and
Eichengreen (2002) showed that the domestic financial liberalization increases the risk taken
by financial institutions, which contribute to the release of the crisis. Noy (2004), tried to
study the probability of the occurrence of banking crisis based on financial liberalization and
banking supervision variables and using a multivariate Probit model. Other studies, which
introduce the concept of securitization such as Uzun and Webb (2007), showed the basic
similarities and differences between banks which securitized their loans and those which do
not do it. Their results show that the size of the bank is a main determinant to differentiate
banks which securitize from those which do not do it, and that the credit securitization is
negatively related to the capital ratio. Keys et al. (2008) validated several assumptions, all
converged towards the same conclusion: the negative effects of the securitization process on
the behavior of banks. The methodology adopted is the use of variables related to the loans
granted to households (FICO Score, the loan characteristics, the maturity, the borrower
characteristics, and the type of the documentation on the borrower…). Ambrose et al. (2005)
showed in their study that banks tend to retain the riskiest credits in their portfolio whereas
they sell the least risky credit. Still more, the authors found that the riskiest credits are those
3
In their article “Banking and currency crises, how commons are twins?”, Glick and Hutchison (2001) show the relation
between bank crisis and exchange crisis, in particular in the emergent countries.
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related to the mortgage backed securities. Wolfe (2000) suggests that banks transfer the risk of
the securitized credits to the investors. However, if the remaining credits have lower quality
than those sold, securitization increases the risk of defect of the bank. Dionne and Harchaoui
(2003) tried to study the relationship between the bank’s capital, securitization and the risk. By
studying the case of Canada for the period 1988-1998, these authors show that “securitization
has negative effects on the ratio of capital, and that there exists a positive relation between the
securitization and the risk of the banks”. Jiangli and Pritsker (2008) found that banks which
have recourse to securitization are those which present a great profitability, a considerable
debt ratio and a less insolvency risk.
Based on a database of 65 banks which emitted “Collateralized Loan Obligations” (CLOs)
between 1995 and 2004, Hirtle (2007), Cebenoyan and Strahan (2004) and Goderis et al.
(2007) conclude that securitization increased the credit lending by banks. Drucker and Puri
(2007) considered a multivariate model and conclude that more the clauses in the lending
contract are severe and numerous, more there will be less agency problems when granting
credits. Minton et al. (2004) conclude that, when the risk is measured by the capital ratio, the
least risky banks are those which securitize more. However, by using other risks
measurements (provisions on credit/net income of the interests) on an European database,
Bannier and Hansel (2008) conclude that the riskiest banks are those which securitize more.
Gorton (2009) confirm the contribution of the real estate prices in the evolution of the process
of securitization as well as the complexity of this financial process, which may generate an
information asymmetry. Franke and Krahnen (2005) suggest finally that securitization, while
making possible for banks to transfer a part of their risks, encourages them to take some more.
This was confirmed empirically by using the method of event. The authors advance that the
systematic risk of banks tends to increase when they announce to proceed to the loans
securitization. This means that the financial market considers that these banks will benefit
from securitization.
3. The Subprime Crisis: Some Stylized Facts
In this section, we will try to transpose the theoretical analysis presented previously on the
recent financial crisis in the United States. Indeed, the development of the direct finance on
the financial market intensifies the banks competition: it’s the phase of displacement. This one
is characterized by an increase in the real mortgage credits to high-risk population, the
guarantee being the real estate. The incentive of American banks to the granting of the
mortgage loans was favoured by the real boom of properties recognized by the government
since 1997 and by the abundant banks liquidity resulted from the securitization process.
Insert figure 1 about here
As shown in figure 1, total bank credit has considerably increased from 4 778,60 billions of
dollars in the first month of 2000 to 9415,3 billion dollars in April 2008, an increase of about
97%. This increase may be due to a much more important increase in the mortgage loans, as
shown in figure 2.
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Insert figure 2 about here
The increase in mortgage credits was higher than 141% between January 2000 and April 2008.
This increase is justified partly by the property’s boom that the country recognized. The figure
3 presents the trend of the real estate price in the United States.
Insert figure 3 about here
Since 1997, The United States has experienced a boom of the real assets price. The average
price increased from 150.500 US dollars in 1997 to reach a peak of 266.000 dollars in 2005.
Shiller (2007) concluded that the index of real asset price on the US market has risen of about
85% between 1997 and 2006. This real assets boom encouraged the banks to grant mortgage
loans to high-risk population. In the worst situation, when the borrower is unable to pay his
debt, the bank can sell the asset. Demyanyk and Van Hemert (2008) advance that the problems
of insolvency of borrowers could have been detected before the occurrence of the subprime
crisis, but the rise of the house price index between 2003 and 2005 masked these problems.
The appreciation of the house price index in this period encourages US banks to grant loans,
even for riskier households, because of the capacity to have surplus when selling the mortgage
house.
The process of the Subprime made it possible for a household to buy a real estate for a fixed
interest rate during the first 2 years (for example 1.45%). Then, the borrower has to pay at
variable rate containing an allowance for risk (for example 8%). If not, the real estate is
mortgaged. In this case, the loan is granted after examination of the value of the real estate,
contrary to the standard practices where the banks grant a credit according to the borrower
solvency. The monthly payments of the loan increase significantly after the second year,
making impossible for the majority of purchasers to repay their loans. Consequently, they sold
their real estate with an increase of the value (the American real estate market increasing by
10% per year) enabling them to repay the loan and the interests and, why not, take again a
Subprime credit on another real estate: It is the phase of euphoria. In addition, thanks to the
new tools of financing on the market, the US banks could securitize their credits. This new
mechanism of securitization made it possible to the banks to have regular liquidity, which
enabled them to grant more and more high-risk loans.
Insert figure 4 about here
The figure 4 shows a considerable increase in the credits securitized by US banks. In fact, the
overall amount of securitized loans have evolved from 1268,6 billions of dollars in January
2000 to 2523,4 billion dollars, an increase of about 100%. Securitization made it possible to
the US banks to have regular liquidity to finance their lending operations. However this phase
of euphoria of the US economy did not hold a long time. In 2006, we observe a general fall in
the prices of the American real estates. The recipients of Subprime who wish to sell their
goods at the end of two years are confronted with the fall of the value of the real estate since
its purchase: the sale does not make it possible any more to repay the Subprime credit. The
borrower of the Subprime credit declares himself as a personal bankruptcy. The bank recovers
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the house and puts it on sale. It will be sold with an important loss that exceeds 20%
sometimes. This phase is known as the phase of distress.
4. Research Methodology and Data
Our empirical analysis is designed to test if the securitization has played a significant role in
the release of the recent subprime crisis. Thus, we introduce financial indicators on American
banks (Indicators which measures the volume of credit securitized, the doubtful debts, the
credit risk, the demand and the supply of the credit and finally, the profitability of American
banks). On the other hand, a macroeconomic variable of house price index is introduced. Our
model aims to check for the probability of failure of American banks according to seven
explanatory variables.
4.1. The Econometric Methodology
According to the previous empirical studies, four types of methods of prediction of financial
crisis are generally used. The simplest one, used especially when there is no theoretical
background, consists to observe the evolution of the macroeconomic parameters in countries
which experiences financial crisis and, to detect possible “anomalies on them”. However, this
method presents some limits for the simple reason that it cannot be neither quantified, nor
subjected to tests of significance. To mitigate these limits, three other methods, considered as
more rigorous, could be used: the method of “events”, a graphic and historical method, the
method of the multivariate models estimated on individual data, either macroeconomic or
microeconomic, and finally the method of the advanced indicators used generally for the
detection of business cycles4.
In this study, we use the panel data logit model. The logit model is one of the most used
models to predict the probability of realization of an event. Jagtiani et al. (2003) affirm that the
use of the simple linear models, like the Logit model, in the early identification of the banking
failures gives more adequate results than the more complex methods, like the nonparametric
models. Plihon and Ben Gamra (2007) affirm that this method, in addition to its simplicity,
have the advantage to measure the contribution of a variable in the probability of the release of
a crisis at a given moment. Moreover, this method makes it possible to take into consideration
the qualitative variables that can be at the origin of the crisis.
According to the Logit model, we suppose that a variable denoted yit* is the latent binary
dependent variable. In fact, we do not model yit but the probability that this variable takes the
value 1 (P (yit =1)). yit* is called the latent variable. The observed variable yit, is connected to
the latent variable as follows: yit takes the value 1 if the bank is a failed one and 0 otherwise. It
is supposed here that yit* depends linearly on a number of explanatory variables xit.
yit * = β ' X it + ε it (1)
4
Dehove, « La détection avancée des crises financières »
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where yi,t* is the binary dependant variable, xi,t is a set of explanatory variables, i = 1,…, 6775
banks, t = 2003,….2007. Consequently,
Exp β ' X it
P ( yit = 1) = P ( yit * ≥ 0) = F ( β ' X it ) =
1 + Exp β ' X it
where F is the logistic distribution function.
4.2. Data Description
In this paper, we employ the Federal Deposit Insurance Corporation 5 database. Our empirical
investigation is conducted on a sample of 6775 US banks located in 50 states between 2003
and 2007. The econometric methodology used is based primarily on the estimation of a Logit
model described below.
DEFAULT _ BANK i ,t = α + βX i,t + δMBSi,t + εi ,t
(2)
Initially, it was necessary for us to distinguish between default banks from those which
are not (healthy ones). Thus, we use the Banker's almanac database in order to determine the
list of failed banks. To do this, we adopt the definition given by Godlewski (2004). Therefore,
a bank is considered as failed if, at least, one of the 4 following situations exists:
- Under administration (support of an institution of regulation)
- Suspended or revoked banking license.
- In liquidation.
- In bankruptcy.
Based on the following criteria, we have identified 78 failed banks between 2003 and 2007.
So, our dependant variable is a binary variable with 1 denoting the onset of failure for bank i
in year t and 0 otherwise. On the basis of the theoretical and empirical analysis presented
above, we explain the probability of default of American banks by seven variables. The first
and most important variable in the specification represents the volume of the securitization
operations for each bank. This variable noted “MBS” will be measured by the value of the
mortgage backed securities. In the same time, a set of control variables which may affect the
probability of the occurrence of banking crisis is introduced. These variables are the total risk
weighted assets / total assets (RISK), the total deposits /Total assets (DEP), the net loans and
leases/ the total assets (LOANS), the return on assets (ROA), the net charge offs to
loans(COL) and finally the house price index (HPI). The table 1 presents the overall variables
used in the econometric investigation, their definitions and expected signs.
5
The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the federal government. It preserves and
promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least
$250,000; by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the
economy and the financial system when a bank or thrift institution fails. The website: http://www.fdic.gov/
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5- Empirical Results
The estimation consists in determining the probability of the failure of 6775 banks over the
period 2003-2007. First of all, we have to be sure for the appropriation of the panel technique.
To do this, we estimate the same equation for each year between 2003 and 2007. The
coefficients and the significance of the variables were sometimes quite different from one
estimate to another, proving that the model should be estimated in panel data. It was then
necessary to check for the assumption of fixed effects. This implies the possibility for the
dependent variable to vary according to the banks and this, independently of the explanatory
variables. In our case, the dependent variable is a binary variable, that’s why the estimate of
the model under the assumption of random effects is preferable. Then we remark a great
disproportion: only 79 failing banks against 6696 healthy ones. This disproportion is likely to
bias our results. To solve this problem, we choose to use the method of King and Zeng (2001).
This method consists in allotting weights to the observations in order to represent their
contribution on the whole population. The weight of each group of observations is represented
as follows: (1/N0)*[N0+N1)/2] for group 0 (healthy banks) and (1/N1)*[N0+N1)/2] for group 1
(failed banks); where N0 and N1 denote respectively the number of observations of the healthy
and failed banks. Finally, a matrix of correlation of the all variables used in the model was
established (Table 2). We do not detect any important correlations between the variables.
The next step consists in the estimation of the model (2) using the Logit technique. The table 3
shows the results of the estimation of the probability of the failure of 6775 American banks
over the period 2003-2007. The global result of the model estimation is significant. In fact, the
likelihood ratio test, testing the significance of all variables introduced in the model, is
conclusive, showing that at least one of the variables represents a good explanatory factor
(rejection of the null assumption of the nullity of the coefficients). From the same point of
view, the seven variables introduced seem to be significant. One may note that the
interpretation of the binary models (Logit, Probit…) is made only on the basis of the sign of
the coefficient of each variable and not on its value. Thus, we will interpret a positive
coefficient by saying that any increase in X,t contributes to make more probable that Prob
(Yi,t=1). A minus coefficient means, inversely, that any increase in Xi,t contributes to draw Yi,t
to its weakest modalities Prob (Yi,t=0).
The significant and positive coefficient of the ratio of the net charge offs to loans (COL)
combined with a positive and significant coefficient of ratio of the total risk-weighted assets to
the total assets (RISK) show that American banks were encouraged to lend credit to high-risk
households. Thus, more the value of the net charge offs to loans is large and that of the ratio of
total risk-weighted assets to the total assets is important, more the bank would be exposed to
the risk of insolvency of the borrowers and more the probability of the failure of this bank is
important. This result is in line with previous empirical studies on the impact of the rise of the
risky debts on the explanation of banking crisis.
Gavin and Hausmann (1998) argue that the doubtful debts may make the banking system more
vulnerable to shocks and even to crisis. In addition, they affirm that the rise of bad and
doubtful debts may induce an increase of the bank vulnerability because of the slowdown of
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
the capital reserved for losses recovery. Noy (2004) announces that financial liberalization, in
the absence of prudential supervision, may induce excessive risk-taking by domestic banks
and even banking crisis. As a consequence, he proposes some regulation practices such as the
establishment of limits on the rate and the volume of credits, especially for certain sectors, like
the real estate.
This risky behavior could be explained by the possibility given to the US banks to securitize
their credits and then to have more liquidity. Then, we test this assumption by introducing the
variable of the mortgage-backed securities (LN_MBS) in the estimated model. Our results
confirmed the role of loans securitization in the failure of banks since the coefficient of the
mortgage-backed securities is positive and statistically significant at 1%. Thus, more the banks
securitize their credits, more they are encouraged to grant high-risk loans, and more the
probability of its failure is important. Gabriel and Rosenthal (2006) conclude that
securitization of subprime mortgage loans raised the access of the low-income households to
credits. Hirtle (2007) and Goderis et al. (2007) find that the securitization helped banks to
increase the supply of credits, since it represents a new funding source for them. Working on
European banks, Bannier and Hansel (2008) conclude that banks which have high risk of
failure are those which securitize more their loans. Hansel and Krahnen (2007) affirm that the
loan securitization provokes banks to take more risks, which may affect their long-run
financial performance.
At the same time, it is often argued that credits securitization made it possible for banks to
realize a rising ratio of profitability. To test this hypothesis, we introduce the variable of the
Return on Assets (ROA). This hypothesis is confirmed by the significant and positive
coefficient of ROA. Failed banks are those which were the most profitable during the years
preceding the crisis. This may be due to the securitization process which generates more
liquidity and permit to banks to grant more loans. Jiangli and Pritsker (2008) affirm that the
securitization rise the profitability of the US bank holding companies. In fact, they found that
the return on equity for the securitizers banks ranges from 10,4% to 13,01%, while the one of
the non-securitizers banks is about 10%.
Finally, the macroeconomic variable of the house price index is introduced in the model to
verify if the decrease of the real estate prices has contributed to the failure of banks which
grant loans. The coefficient has a significant and negative sign. We could interpret this result
by saying that the subprime crisis started in the United States was also explained by the
spectacular fall in the prices of the real estate making impossible for the majority of the
households to refund their debts, and for banks to recuperate the amount of the loan when
selling the mortgaged real estate. Demyanyk and Van Hemert (2008) find that the appreciation
of house prices masked the occurrence of the Subprimes crisis in the United States. However,
once the house prices start to decline in the beginning of 2006, the Subprime crisis became
more apparent. Goetzmann et al. (2009), using econometric analysis of the house prices before
2006, advance that the fall of this latter was not forecasted and that the borrowers and the
lenders (banks) estimated an extrapolation of its rise in the future.
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6. Concluding Remarks
This study seeks to examine the impact of a new financial innovation, namely the
securitization, on the behavior of American banks and thereafter on the occurrence of the
subprime crisis in the United States. Based on previous empirical works, the objective of our
research is to test the hypothesis of the excessive risk taken by US bank firms. This high risk
may be encouraged by the possibility for American banks to securitize their loans. Working on
a database including 6775 deposit American banks located in 50 states, we search to test the
impact of the securitization on the probability of the failure of American banks over five years
between 2003 and 2007. This period is so critical since it just precedes the occurrence crisis
and is characterized by the development of the volume of the securitized loans.
Our results confirm the general assumption of the excessive risk taken by the US bank firms.
In fact, the riskier assets and the bad and doubtful loans are found to increase the probability
of the failure of the US banks. At the same time, we found a positive relationship between the
volume of the securitized credits and the banking failures, suggesting that banks which
securitize more their loans are those for which the probability of failure is higher. This result
was supplemented by the introduction of other control variables. We found that banks which
securitize more are those which have an increasing rate of profitability following an excessive
risk-taking when granting loans. In addition, another interesting conclusion is that the current
financial crisis has also a macroeconomic explanation. The price level of the real estate
contributed largely to the occurrence of the recent crisis in the United States, especially since
2006. This result should however be checked with consideration of other macroeconomic
variables which seem to exert an impact on the Subprime crisis, such as the real interest rate.
According to these results, several policy recommendations on the banking supervision
policies and the prudential standards applied to the banking system should be addressed.
Among them, we mention a better transparency of the dispersion of the credit risk, a control of
the methodology adopted by the credit rating agencies in the evaluation of the emitted bonds, a
revision of the banking supervision standards by the consideration of the ratio of the volume
of the securitized credits.
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Godlewski (2004). Modélisation de la prévision de défaillance de la banque, une application
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Figure 1. Evolution of the volume of bank credit (Billions of dollars)
Data source: Federal Reserve Statistical Releases
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Figure 2. Mortgage credits (Billions of dollars)
Data source: Federal Reserve Statistical Releases
Figure 3. Evolution of the existing home prices
Data source: National Association of Realtors
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Figure 4. Evolution of the securitized bank credits
Data source: Federal Reserve Statistical Releases
Table 1: Data description
V ar iab les
DEFAULT_BANK
LN_Mortgage-backed securities
(MBS)
De fini tio n
Ex pecte d sign
The dependent variable. It
represents the probability of
the defect of the bank. It is a
binary variable which takes the
value 1 if the bank is failed or
0 in the contrary case.
The volume of the securitized
credits: mortgage backed.
--------------------
Total risk-weighted assets / Total
assets (RISK)
The credit risk: It represents
the minimum of capital due
based on the percentage of the
banking credits balanced by the
level of risk
Total deposits
(DEP)
The demand for credit. It is the
ratio of the total deposit
compared to the total assets of
the bank.
/Total
assets
163
The expected sign is positive, higher is
the ratio more the bank is encouraged to
take excessive risk by financing
mortgage operations. The Excessive risk
taken is encouraged by the possibility
given to banks to securitize their credits.
The expected sign is positive. The
probability of defect of the bank rises
with the increase of its risky credit.
The expected sign is negative. Indeed, a
failed bank is the one which
concentrates less and less on its
traditional activities, the lending of
credit on the basis of the volume of the
deposits. So, higher is the ratio, less will
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
be the failure probability of the bank.
Net Loans and Leases/ Total
assets (LOANS)
This variable measures the
credit supply: Ratio of the total
credit compared to the total of
assets
The expected sign is positive. Higher is
this ratio, more the bank tends to grant
high-risk loans and the probability of the
failure of the bank increases.
Return on assets (ROA)
The earning of the assets
invested (net result/total credit)
The expected sign is negative: a failed
bank is that which have a decreasing
growth rate of profit.
Net Charge offs to loans
(COL)
The quality of the held credits:
Ratio of the doubtful debts on
total home credit
This variable measures the quality of the
held credits: ratio of the doubtful debts
on total credit. We expect a positive sign:
the larger this ratio is, more the quality of the
credits is poor and more the borrowers tend
to be insolvent.
House Price Index (HPI)
It represents the house price
index in the United States
The fall of the real estate prices
combined with the rise of interest rates
may induce the incapacity of the
households to honor their engagements
and the incapacity of banks to have
surplus when selling the mortgage
house. Then, the expected sign is
negative: weaker is the value of the real
estate, more important would be the
probability of failure of the bank.
Table 2. Stamp correlations of the variables
Variables
DEFAULT_BANK
DEFAULT_BANK
RISK
DEP
LN_MBS
ROA
1.0000
RISK
DEP
LN_MBS
ROA
0.0578
1.0000
0.0005
-0.0150
1.0000
0.0495
0.0106
0.0450
1.0000
-0.0063
0.1023
-0.0027
1.0000
LOANS
0.0014
0.0242
0.0834
0.1211
0.0002
LN_HPI
0.0000
-0.1021
0.0035
COL
0.0087
0.1004
0.0240
0.0050
0.0002
0.0209
164
-0.0179
0.1659
LOANS
LN_HPI
COL
1.0000
0.0039
1.0000
0.0033
0.0111
1.0000
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Table 3: Contribution of the explanatory variables in the probability of the failures of the
banks
Dependant variable: DEFAULT_BANK
Random effect Logistic Regression
Number of groups= 6775
Period: 2003-2007
Number of observation= 33875
(***), (**) and (*) are significant coefficients at 1%, 5% and 10% level respectively.
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Mehmet YUMURTACI
Faculty of Technical Education
Afyon Kocatepe University, Turkey
[email protected]
Ali KEÇEBAŞ
Faculty of Technical Education
Afyon Kocatepe University, Turkey
[email protected]
Mehmet Ali ALKAN
Ula Ali Kocman Vocational High School
Mugla University, Turkey
[email protected]
TURKEY’S RENEWABLE ENERGY SOURCES
IN THE GLOBAL FINANCIAL CRISIS
Abstract
Machines that have very high production capacity were occurred as a result of quick
development of industrialization alongside application of existed development in technology
area to production. In every the other day energy necessity is increased with usage of these
machines that make very big production in order to meet people’s necessities. Important
portion of energy necessity is supplied from fossil fuel such as coal, petrol, natural gas etc.
sources. But countries is tended towards alternative energy sources in order to supply
continuity of energy sources and to prevent environmental pollution due to some reasons such
as; energy obtained form fossil fuels is limited, supplying of energy sources security is
difficult and these sources damage environment in spite of increment of energy necessity in
every the other day. As in all over the world, safe and continuous ways to arrive energy were
searched in our country. In this frame studies were made bye various installations and
alternative energy sources were determined for Turkey. In present energy sources the best
source for energy-economy-environment trio is renewable energy sources and also must be
given priority to form incentive legal arrangement and incitement mechanisms for building of
this kind plants due to alternative energy sources have positive influence such as habitant
sources, supplying employment possibility and bringing liveliness to country economy.
Keywords: Global financial crisis, Renewable energy sources, Present status.
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1. Introduction
Energy is at front of important inputs for economic and social development. Energy procuring
and effective usage are one of today’s important problems depending on giving out of reserve
of fossil fuel that supplies a big portion of world’s energy necessity with big speed; coming to
dangerous state of greenhouse gas emissions for people life and damaging of ozone layer. In
world and Turkey big portion of energy necessity still is supplied from fossil fuels (coal,
petrol, natural gas etc.) (Çolak et al., 2005).
Fossil fuels were earned an important superiority against of renewable energy sources (RES)
especially for last two centuries as a result of development and being cheap of production
technology and also widespread usage. Petrol and coal domination had been continued trouble
less for long years, but an insecurity media was created by1973 Petrol Crisis firstly. All over
the world concentrated connection on RES was caused by this insecurity media. Mains of RES
can be said as hydraulic, wind, solar, geothermal, biomass and wave (Çolak et al., 2004). At
1980’s petrol prices had decreased, but energy security problem that came to agenda as a
result of petrol crisis was been permanent and protected its important. At result of this it
became one of indispensable elements of energy politics.
2. Development of RES
Rising of providing of energy security and tending to source variety obligation had caused to
taking part of renewable energy sources at energy fan too. Another development supporting
renewable energy sources development hade taken shape during Human Environment
Conference at 1972 in Stockholm. Principles that attract attention to carriage capacity of
environment, take care of equity between generations for usage of sources, make connection
between economic and social development with environment and emphasize between
development and environment and base detent of continuable development are exhibited in
Stockholm Proclamation. In 1990’s clean environment consciousness was further developed.
This consciousness was understood that conventional energy production and consumption
cause negative effects directly at local, regional and global level on environment and natural
sources and was given rise to supporting renewable energy sources that don’t given emissions
which cause dirtiness to atmosphere as “clean energies”.
When energy that is one of the indispensable basic necessity sources for daily life of mankind
is provided or with another words, when energy sources is used, necessity effort must be
expended and precautions must be taken not to destroy livable areas for posterity. Warmth at
world was reached to the highest level of last thousand years due to required effort don’t show
for getting medias that was told at past or important of the issue was noticed late and usage of
fossil sources. In addition to this natural calamities as drought, torrent, storm was occurred/is
occurred as a result of climate change, in addition to cause soul and estate losses, human
health was affected/is affected negatively.
Aim of supplying as economic and not to destroy environment of energy that is needed for
human was became the foreground as result of these negativeness is seen. In this circumstance
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“Climate Change Environment Agreement (CCEA)” is submitted for signature to member
countries at Environment and Development Conference at Rio in 1992 with big participation
by United Nations because of rising international cooperation necessity. Obligation of
decreasing of greenhouse gas emission of 2000 to levels of 1990 is brought for developed
countries with CCEA. In 1997, obligation of decreasing of greenhouse gas emissions at least
5% according to level of 1990 was brought to signer countries with Kyoto Protocol that is
prepared according to CCEA. In the circumstances European Union (EU) was accepted
supplying 8% reduction standpoint of both union and other countries.
In this frame usage of all hydroelectric renewable and international support is deemed worthy
result of published declaration with participation and consensus of countries representatives
more than 170 World Continuable Development Summit at Johannesburg in 2002, then this
standpoint is stood at 3. World Water Forum at Kyoto in 2003 and Renewable Energy Politic
network for 21. Century (REN21) Conference at Bonn in 2004 with participation of 154
countries representatives (Martinot, 2006).
Also with aim of prevent negativeness that caused climate changes, giving priority to Energy
Efficiency, Renewable Energy, Afforestation and to catch carbon dioxide (CO2) and storage
topics is decided at Climate Change Parties Conference (Conference of the Parties (CoP12)) at
Canada in 2005. Energy sources that has renewable characteristic is given rise with made a
decision in here
Performing studies as integrated about renewable energy sources and energy efficiency for
continuable development will supply obtaining of more successful results. As a matter of fact
studies in all over the world are performed appropriate to this direction. When energy that is
one of the indispensable basic necessity sources for daily life of mankind is provided or with
another words, when energy sources is used, necessity effort must be expended and
precautions must be taken not to destroy livable areas for posterity.
3. RES in World and Turkey and Usage Status
3.1. Hydroelectric
Determinations of Hydroelectric potential are made from three different standpoints. First of
these is gross potential, in here technical and economical feasibility doesn’t take into
consideration. Determination of second potential is standpoint of technical feasibility. Also in
here economical feasibility doesn’t take into consideration. Determination of third potential is
economical feasibility potential so this potential can show modification depending on
technological developments and approaches in energy politics (Gürbüz, 2007).
According to this, theoretical gross hydroelectric potential of Turkey is 433 billion kWh, this
value corresponds to approximately 1% of total theoretical hydroelectric potential which total
of theoretical hydroelectric potential is given base continent in Table 1 and 14% of potential in
Europe. Potential that has technical feasibility is remained 50% stage (216 billion kWh) of
gross potential. At present conditions, usable potential as economical is around 30% (130
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Billion kWh) of theoretical potential. As well as some reiterated, it isn’t clear but when
projects are developed by private sector take in consideration, as seen in Figure 1 this value is
reached to 35% stage (150 Billion kWh).
Table 1. Hydroelectric potential in World and utilizing status.
Theoretical Technical Economical
Potential
EXPLANATION
Potential
Potential
Potential on Operation
(GWh/Year) (GWh/Year) (GWh/Year) (GWh/Year)
Africa
4.000.000
1.665.000
1.000.000
84.000
Asia
19.000.000
6.800.000
3.600.000
805.000
Australia/Oceania
600.000
270.000
105.000
43.000
Europe
3.150.000
1.225.000
800.000
569.000
Central and North
6.000.000
1.500.000
1.100.000
693.000
America
South America
7.400.000
2.600.000
2.300.000
554.000
TOTAL OF WORLD
40.150.000 14.060.000
8.905.000
2.889.000
TURKEY
433.000
216.000
130.323
45.930
Figure 1. Development status of hydroelectric energy potential of Turkey
3.2. Wind
Wind energy potential of Turkey shows diversity at regions base depending on wind speed and
wind continuity, especially a big potential is found at west (Thrace and Aegean) and south
(Hatay and its around) of Turkey. At result of Wind Energy Potential Map study which is
made by Ministry of Energy and Natural Resources- Management of Electric Works Study,
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when wind speed that is above 6.8 m/s is take into consideration in Turkey, wind energy
potential of Turkey is around 48.000 MW. At present energy can be produced from 393MW
of this potential.
After 1990s important investments had made for electric production from wind energy in
world and countries of European Union depending on global warming and greenhouse gas
emissions. As shown in graph given in Figure 2, usage of renewable energy sources is
increased every the other day in countries of Europe, especially in Germany (BP, 2008).
Figure 2. Development of usage of renewable energy sources in Germany
3.3. Solar
Solar energy potential of Turkey is annual average bask period 2640 hours, daily 7.2 hours.
Daily average radiation is 3.6 kWh/m2, annual average radiation is 1311kWh/m2. Present 11.5
million m2 solar collectors is used for supplying hot water commonly and every year average 1
million m2 capacity to this capacity. Result of Solar Energy Potential Map made by Ministry
of Energy and Natural Resources- Management of Electric Works Study showed that there is
solar energy capacity equals to 56.000 MW thermal power plant capacity and when this
capacity uses, possibility annual average electric energy production capacity is 380 billion
kWh. Whereas this capacity is used slightly, present total solar cell (PV) capacity is at about
1000kW.
3.4. Geothermal
There is 31.500 MW (20 MTEP) thermal potential in Turkey, but present 500 MW of this
potential is appropriate for electric production. As electric production, 27 MW is on operation
and 25 MW is in case of building. 1229 MW of total potential is used.
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3.5. Bioenergy
According to study made by Ministry of Agriculture and TUBITAK-MAM, there is 8.6
million TEP potential, 5.1 million TEP is used as directly firing. Also there is 1.5 MTEP
biodiesel production potential from 1.9 million hectare unused agricultural land and 3.5 MTEP
bioethanol production potential from beetroot planting area.
4. Incitement Politics in Turkey for RES
Minimum price guarantee (5 Eurocent/kWh) for energy will be produced from renewable
energy sources and buying guarantees for certain time (10 years) is brought with 5346
numbered “Corresponding to Usage of Renewable Energy Sources with view to Electric
Energy Production” that came into force as issued at 25819 numbered official gazettes in
2005. Also supplying easiness for treasure and forest land at places where will be established
these plants, giving RES certificate because of its renewable characteristic and they are
exempted from being company which installs plant up to 500kW on the brink of meet own
necessities with same law with made modification at 4628 numbered law and getting license.
RES law contains matters about usage and incitement of new and renewable sources (hydro,
wind, geothermal, solar, biomass, hydrogen, etc.), in other energy production fields on the
brink of firstly electric energy production, developing of national production facilities and
supplying and usage necessary sources for incitement
Supplying of energy that required for decreasing of energy input cost is carried weight as
safety and economically considering first rule of emulation at world markets in liberal
economic structure is to reduce production costs to minimum level. Some private sector with
this purpose, some private sector with opinion that instead of production difficulty is
marketing of produced product or estate, there isn’t market problem due to electric energy
demand is increase every year annual average up to 7-8%, so entrepreneurs was entered to
energy sector.
5. Conclusion
Reengineering of energy sector and at first years of opening to competition of sector as
organizing free market order, in present energy sources the best source for energy-economyenvironment trio is renewable energy sources and also must be given priority to form incentive
legal arrangement and incitement mechanisms for building of this kind plants due to
alternative energy sources have positive influence such as habitant sources, supplying
employment possibility and bringing liveliness to country economy.
Average of increment at population, industry, urbanization of Turkey, also increment at
electric consumption as parallel increment at economic prosperity level for long years is at 78% level; in future continuation of this increment is expected for long years.
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75% of energy consumption of Turkey is met by importing. Foreign trade deficit is grown as
parallel to increment of paid foreign currency amount because of increasing petrol and natural
gas prices. Such that renewable energy sources is domestic; so increasing of produced energy
from these sources, will contribute to decreasing of energy import addition to advantage for
supply security, will prevent energy import. Also there are big advantages at operate all of
renewable energy sources of Turkey as soon as possible, when advantages is thought such as
not forming environmental negativeness, supplying contribution to economic perking up.
In this connection, usage and development domestic and clean energy sources inside major
energy politics and strategies of our country must be given priority and environmental effects
must be taken into consideration in every stage.
References
BP, Statistical Review of World Energy, June 2008.
Çolak, I, Bayındır, R., Sefa, I., Demirbas, S. and Ergen, H. (2005). Alternatif enerji
kaynaklarının kullanımı, The Third Symposium of Renewable Energy Sources, Mersin,
Turkey, (in Turkish).
Çolak, I., Bayindir, R., Sefa, I. and Demirtas, M. (2004). Design of a hybrid energy power
system using solar and wind energy, 2. International Conference on Technical and Physical
Problems in Power Engineering, Tebriz, Iran.
Gürbüz, A. (2007). Sürdürülebilir enerji temini kapsamında hidrolik kaynaklı enerjinin önemi,
Symposium of Renewable Energy Sources, Kayseri, Turkey, (in Turkish).
Martinot, E., Renewables Galobal Status Report 2006 Update, Renewable Energy Policy
Network for the 21st Century.
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Fahreen ALAMGIR
School of Management
RMIT University, Australia
[email protected]
A TIME TO LOVE AND A TIME TO DIE: AN INTERPRETATION OF GLOBAL
INTEGRATION OF A PUBLIC SECTOR JUTE MILLS AS AN EXPORT
PROCESSING ZONE
Abstract
In this paper, I explore the impact of current global financial crisis on Adamjee Export
Processing Zone (AEPZ) of a post colonial state - Bangladesh. Here, I firstly explore the
context and implications of the discourse of globalisation that initiated the decision of
de(re)(con)structuring Adamjee Jute Mills (AJMs) the largest jute mills of the world as an
EPZ for ensuring economic sustainability. Secondly I search for the underlying and
undercutting issues that construct the current manifestation of AEPZ. Drawing upon the
conceptual framework of Foucauldian approach along with the theory of World System, I have
revisited the country’s historical, political, social and cultural constructions that have
contributed in the process of global integration of Bangladesh economy. Positing that there is
no single reality to observe the issue, I take an attempt to explore the implications of the
discourse and practices of globalisation along with the current global financial crisis through
de(con)structing the context and text of a loss making public sector jute mill and (un)making
of an economically (un) viable EPZ. Although the current manifestation implies that majority
of the involved community are dislocated and deprived, EPZs at the policy level are still
perceived and considered viable projects.
Keywords: Discourse of globalisation, Export processing zone, Jute Mills.
‘We must know whether or not we are affected or moved by the thing represented and what
reasons we have for being or not being so affected’.
- Foucault (2006) Hermeneutics of the Subject; p503
1. Introduction
This paper reviews the implication of current global financial crisis through presenting
empirical evidence of Adamjee Export Processing Zone (AEPZ) of a postcolonial stateBangladesh. This EPZ has been reconstructed through dismantling Adamjee Jute Mills
(AJMs), which used to be renowned as the largest jute mill of the world.
Within the context of discourse of sustainability, growth and development of neo-liberalism,
the whole public sector jute mills have been under the reform agenda of Jute Sector
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Adjustment Credit Program (JSAC), since 1991. Closing down the AJMs is conceived as
policy implications of the second trance provided by global policy regime under JSAC.
Global policy regime refers The World Bank (WB), The International Monetary Fund (IMF),
The World Trade Organisations (WTO) and the United Nations (UN). While reform process
generally considers privatisation as the only effective mode of restructuring process, in case of
AJMs transforming it into an EPZ appeared more rational and realistic.
EPZs are considered as free economic enclaves (Aimn 1976), appear as a constituting
elements of rational economic growth model that prevails as examples in all those newly
industrialised countries (NIC)s (Frank 1991). Replicating NICs growth model is conceived as
one of the major measures to be integrated into the process of globalisation. It is envisaged
that adapting such measures help the less developed countries in escalating the notions of
standard of living and reducing poverty and pauperisation (Amin, 2004).
In this context the process of problematisation is initiated with contextual analysis that
initiated the decision of de(re)(con)structuring AJM as an EPZ for ensuring economic
sustainability. This paper has been structured into three major sections. The paper begins by
the contextual analysis of the failure of AJMs, followed by the discussion on underlying and
undercutting issues responsible for construction of AEPZ. Finally its current manifestation and
how it has impacted the community are discussed.
2. Methodology
In this analysis, I draw upon both Foucauldian approach and genealogy of world system as my
strategic frame of reference. The discursive arguments of the world system theory conducts
historically analysis and highlights ruptures and discontinuities through discussing what has
been done and what in reality is done from social, political and cultural perspectives (Foucault
1998); precisely from the perspective of political economy. Thus it reflects underpinning
issues of the history of critical thoughts and provides the background of historical integration
of Bangladesh as postcolonial state within the world system and with the single world
economy; through informing us how the construction has been done in terms of structure and
social formation. The structure is denoted as centre and periphery. The centres possess highly
developed technology, therefore capable in auto-centric resource generation and possess
highly skilled labour force (Amin 1990, 1976; Wallerestein 1975, 1974 a&b; Prebisch, 1959).
Similarly; the peripheries are categorised in terms of their limitations, for instance: expertise
in technology for extracting resources; expertise in handling technology; and dependency on
the centres for accumulation process (Amin 1976, 1990). Therefore peripheries labour force is
unskilled or semi-skilled and comparatively cheaper (Wallerestein, 1975, 1974 a&b).
The postcolonial context of Bangladesh comprises of hundred almost two years of British rule.
In 1947, it had become a province of Pakistan as East Pakistan. However through popular
movement and a bloody War of Independence Bangladesh became an independent country in
1971.
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I have reviewed a series of news paper reports, features and publications of civil society
organisations from 2002 to till August 2009. I take an attempt to examine the existing power
dynamics at local and global level through deconstructing the dominant discourse and how it
has impacted the life-world of AJM and later as AEPZ. Drawing upon on both critical
discourse and hermeneutic analysis the write up focuses on who really benefited and who
really exploited or deprived (Philips & Hardy, 2002) through such construction.
i) Contextual Analysis of reconstruction of AEPZ
Jute used to be acclaimed as the golden fibre of Bangladesh (Levi Strauss 1952, Jute Policy
2002). The country used to earn a huge foreign exchange through exporting jute goods.
According to official statistics 35 million people (25% of the total population live on
cultivating, manufacturing and trading jute goods. Jute sector is the second largest
employment sector of the country as 10% of the total labour force is employed in this sector
(Rahman 2009). In this section there will be an analysis on the failure of AJMs as jute mills
and then the background of reconstruction of AEPZ.
Anatomy of failure of AJMs: Construction or a real crisis?
In contemporary mainstream literature chronic loss because of inefficiency, burden of
excessive
employment, corruption, massive politics and trade unionism, in AJM are
discussed with certain regularities (Bhshkar, Gupta and Khan, 2006; Bhaskar and Khan, 1995;
& Hoque, Siddique & Hopper, 1994) as the causes of failure. Therefore the prime condition of
the second trances under JSAC (Jute Sector Adjustment Credit) was closing down AJM.
Concurrently there is another parallel discourse of neo-liberalism on efficiency, sustainability
and development, model of economic growth, golden handshakes, and end of contract benefit
through global policy regime. The dominant discourse establishes those notions as system and
provides certain objectivity of its actions. Because of such huge amount of loan for
Bangladesh the per capita loan stands 140USD; while the per capita Gross national income is
$772(Source:http://web.worldbank.org; retrieved July 28; 2009).
On the contrary the historical analysis claims that jute workers have been always perceived as
militant. In fact during the colonial period there had been violent conflicts between Hindu and
Muslim jute workers (Chakrabarty, 1989). Such conflicts shifted to a conflict between non
Bangali and Banagli workers; due to favouritism of the management to the non –Bangali
workers during Pakistan regime, particular in AJMs (Maron, 1954). It had been reported that
in such violence between Bangalis and non Bangalis(mainly Bihari) officially 500 people had
been died (Maron 1954). Such rupture at initial stage did not cause loss in production process.
Gradually through the involvement with trade union workers perceived themselves as a
collected body and learnt to put up their collected agenda. In that context during and after the
Liberation War of 1971, the workers of AJMs played a great role. With the support of the
workers the post-independent government nationalised the mills and created this space where
the all workers irrespective of their ethnic background (along with Bihari workers) started
working. From 1972-2002, the contributions of Adamjee to the economy was $529.14 million
USD out of which 319.71 million USD was foreign currency (Mostafa, 2008).
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Politicisation of the trade union was initiated after 1973.As the post independent government
made it compulsory for the trade union to join to single-state-political party Ahmad and
(Sobhan 1980). Such initiatives made trade union as a platform to be linked with power nexus
to the opportunists (Sobhan and Ahmad, 1980). Evidences suggest that the post-independent
government nationalised AJMs and established Bangladesh Jute Mills Corporation as an
umbrella organisation (Sobhan and Ahmad, 1980). Responsibilities of BJMC were to connect
the backward linkage jute cultivation with the industrial initiatives along with the approach of
marketing at global level (Sobhan and Ahmad, 1980). But such pragmatic approach was
constrained as the systematic representations of employers rested with state executives and
with the politicians (Sobhan, 1979). As a result the dominance of the state owner enterprises
such as AJMs in terms of their contribution in the economy as well as their performance in
reality is determined and constrained by the nexus of bureaucracy petit bourgeoisie; in case of
Bangladesh there is another actor that is external influence (Sobhan, 1979). Hence, AJMs
became a tool of resource appropriation and space of demonstrating power (Sobhan, 1979).
Subsequently, the consecutive two army regimes (after the pro-state-socialist post independent
regime was toppled by military in 1975) reaped the benefit of such construction, through
institutionalised the politics of patron client relations with trade union leaders (Monem 2002).
This process has constructed an image of trade unions as a violence producing institutions.
Eventually the mode of such construction has supported in the following ways, firstly: it has
reinforced bureaucratic power, as the management process has been completely rested with
the bureaucrats (Hoque, Siddique and Hopper, 1994). On the contrary, general workers have
been deprived of taking part in the decision making process on managerial issues; in
negotiation on benefit packages, facilities; and thus making management accountable through
the collective image of active trade unions. They have been forced to play the role of a wage
labours only. Hence, they have become silent spectators of corruptions at their own mills.
Interestingly survey report of the Ministry of Jute states the sector usually faces loss mostly
because of the delayed payment by the Nationalised Commercial Banks for buying the raw
jute, and second largest cause is frequent power disruptions. On the contrary, loss due to the
labour unrest takes the fourth position as a contributing cause of loss in the whole sector
(Muhammad 2007, p.4). Correspondingly as a part of the process the first army regime
established Bangladesh Export Processing Zone Author (BEPZA) under its Revised Industrial
Policy (RIP). Second army regime established free EPZs. The provided facilities in EPZs
include exemption of some legal measures such as right to build associations for the workers
and rights to build trade unions in those enclaves (ICTU, 2000).
Within this context the disinvestments of AJMs and construction of AEPZ had been
conducted. Because of its massive size and involvement of people the BNP-led four parties alliance (Bangladesh Nationalist Party) government took tow tenures to draw the conclusion
of the story that had been initiated during it first tenure in 1994. The official closure was done
in June 30; 2002. The government had to retrench 30,000 workers and employees and to evict
500, 000 people from a place where they had been for almost fifty years. Moreover 10 million
farmers were dependent on the amount of Jute demanded by the AJM.AJM had to buy 20
lakh metric tons jute from its 36 purchasing centres all over the country (Mostafa, 2008) .
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Although the WB provided 250 million USD as a credit at a minimum service rate .75%o to
the government for paying the end benefit to the workers and employees of AJMs (Mostafa,
2008), the series of massive protests and demonstration provide us other images about the
disinvestment and payment process connected with AJMs. Jute suppliers staged chronic sit in
strike for demanding their dues in entire 2003. Out of their 6.286 million USD dues the
Ministry of Finance had released 3.14 million USD (The Daily Star August7; 2003). In April
3; 2004, one thousands five hundreds farmers and traders threatened the BJMC and the
government to go on hunger strike for the payment of the rest of the dues (The Daily Star
April3; 2004). Simultaneously evidences claims that undervaluation of the machineries and
the closure of AJM caused 1.49 billion USD shortfalls to the government, since the valuation
done by the inventory committee had not been done at the market rate of that time (The Daily
Star 26 August, 2008). Interestingly AJMs holds the eighth position on the list of top
defaulters, the amount of default loan is 17.82 million USD (The Daily Star July 7, 2009).
Thus we can conclude that grand level corruption occurred at policy making level during the
process of disinvestment.
While at the local level the dominant discourse communicates that the sector has lost it
viability at the global level has reinforced the decision of reconstruction AEPZ. It received
support from the business community and global policy regime (The Daily Star July 5, 2002).
The global policy regime along with the government agencies consistently reaffirmed that
there would be more than four hundreds million USD investment in AEPZ and it would be
able to create 100,000 jobs (The Daily Star 6 March, 2006). Interestingly parallel to this
dominant discourse of declining global demand of jute, at regional level we find that the
Indian government is planning to double its volume of export of jute goods by 2010
(Muhamad 2007). Consequently at the global level the year 2009 has been declared as
International Year for Natural Fibre (IYNF), with the following objectives, (i) to raise
awareness and stimulate the demand of natural fibres and (ii) to encourage the government to
make appropriate policy for ensuring the ‘sustainability and efficiency of the natural fibre
industries’. Yet the proposal of ‘International Year of Natural Fibres (IYNF09) had been
discussed at a joint meeting of the intergovernmental group on hard fibres and the intergovernmental group on Jute (http://www.naturalfibres2009.org/en/fibres/jute.html) at Food
and Agricultural Organisation (FAO)in 2004. While in 2004 the cabinet committee of
Bangladesh took a decision to (de)construct AJM into an EPZ (The Daily Star 18 December,
2004).
Such dialectic between discourse and set-practice at local, regional and global level denotes
the inherent characteristics of neo-liberalism. Unmasking prevailing discourse reveals that the
whole process has been designed to construct the collapse of the total governance structure of
the Jute sector, through rationalising the non viability of the sector at global level.
ii) AEPZ and its consequences: Myth versus reality
Apparently because of aspiring promises of investment from the international arena, AEPZ
perceived as a viable venture according to the related and involved institutions such BEPZA
and WB. It was officially inaugurated in March 2006 (The Daily Star 6 March, 2006). During
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the inauguration program, the BEPZA reported to the press that 37 plots had been handed
over, to the following companies: such as British Virgin Island; Hong Kong based Kwan Troy
Apparels Ltd, Canada based Hy Lan Sweater International and Saleha Wear Ltd a local
company and DNV clothing as a joint venture. The EPZS would become fully in operation
within 18 months. The authority further assured that AEPZ was expected to generate USD 750
million earning for the country in a year with an expectation of creation of 100,000 jobs for
the people (The Daily Star, March 6, 2006).
Similarly the Country Director of the World Bank Xian Zhu (Zhu, 2007) reaffirms that in
2002, jute sector reforms got a new lease of life with the closure of Adamjee Jute Mills
(AJMs). This alone led to a decrease in BJMC's losses from Tk3.9 billion in FY2002 to Tk2.1
billion in FY2003. It also led to an increase in BJMC's productivity, which jumped from
roughly Tk25, 000 per employee in FY2001 to Tk39, 000 per employee in FY2003.
Zhu(2007) considers the conversion of Adamjee into an AEPZ in 2006 as a landmark in the
country's economic management and industrial development history. All developed plots have
been allocated to both local and foreign companies and as of January 2007, industries in
operation have created direct employment for 34,000 people. Once fully operational, 70,000
people would be employed in AEPZ (Zhu, 2007).
However , after one year of such statements according to the Project Director of AEPZ the
real investment in AEPZ is 45.39 million USD and only 6000 workers have been employed;
against the announcement of investment of 400 million USD (The Daily Star September 5;
2008). A Canadian company Hy-Lan sweater International Ltd started operation at AEPZ in
March 2006, which was the first significant investment after launching AEPZ (The Daily Star,
September 5, 2008).
Due to global financial crisis the trend of FDI in September 2008- January 2009 was sluggish
if we compare the trend of the corresponding period of FY2007-2008, in export earnings
(Rahman 2009). Such acute crisis is foreseeable since the foreign direct investment is the
critical for less developed countries export-led growth venture such as EPZ. Although at
local level the policy makers are quite complacent about the economic turnover, restrictive
measures in the deregulation of capital accounts appear as rescuing factor. Aspects of financial
fluidity diverse, diverge and dynamic (Jameson, 2000). The singularity of the economy is
deepening; AEPZ has to bear the backlash of the current global financial crisis. The
manifestations of investment and employment trend only in AEPZs imply the backlash of the
crisis in a remote peripheral country. It seems even in six years none of the initiatives could be
able to ensure employment of same number of people who lost job because of closure of the
mills. AEPZ remains as an illusion in terms of institutionally linked discourse and its
constructed reality.
Failure of AJMs and AEPZ can be traced within the framework historical socio- economic,
cultural and
political structure of the country. According to the theory of critical political
economy penetrating resources accumulation process by the colonisers indeed is the root
causes of such structural crisis (Amin, 1976; Frank, 1990; Wallerstein, 1974 a&b). The
manipulation of technology of production and sign and system constituted the economy to be
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destined as exporter of primary products (Gills & Frank1991, Frank (1990). Therefore jute
that once used to integrate the economy of Bangladesh with the global market is now deemed
as a failure sector. Such construction connotes that the country is destined to export only raw
jute.
Secondly: the total failure of establishing workers’ ownership on the public sector jute mills
such as on AJMs can be explained with the framework of ethno-nations (Wallerstein, 1990)
and lumpen-bourgeoisie. Manipulation of these two technologies of production initiated
technology of subjugation along with governmentality. Therefore political technology is
exerted throughout the social body (Foucault 1988, p.185). This process has created ethnonation Wallerstein (1990). Ethno-nation comprises of indigenous bourgeoisie petit
bourgeoisie, bureaucrats both army and civil, and politicians. In this context, flow of foreign
funds as debt and aid from the centres after the independence in ex-colonial countries caused
emergence of the lumpenbourgeoisie class. It comprises most of the constituting element
ethno-nations, but they are the major actors in deciding the redistributive mechanisms of
foreign funds and help in establishing patron-client relations with the centres (Baran 1973).
They are engaged in the one-way resource accumulation process (Gill and Frank, 1991) and
formation of rentier state (Baran, 1973).
After the War of Independence in 1971 all deserted industrial venture came under the public
sector. But the lumpenbourgeoisie played a strong role in establishing their hegemony and the
post-independent government failed in establishing ownerships of the workers on the means of
production. This lack of ownership of the workers on the AJMs led to a passive role of the
workers in resisting the management and policy level corruptions – finally to the failure of the
workers in resisting the pressure of disinvestment and conversion of AEPZs.
iv) Implications on the community
Major implications of dismantling AJMs and failure of AEPZ on the community are:
sponsored unemployment formally though the discourse of “golden hand shakes”; annihilation
of identity as formal workforce; creation of reserve industrial workforce with fragmented
individual identity; forceful evictions; dislocation; and loss of possibility to be integrated into
the formal workforce again.
In reality such constructions created a feeling of dispossession; broke down the generation
loop that had been constructed for fifty years. Mills premises adjacent colonies of the workers,
schools and mosques used to define and set the routine of their lives. Such industrial culture
also provided them a hope of integrating their generation into that formal workforce.
Evidences suggest that even before the closing down AJMs six thousands students used to be
taught in five schools located in Adamjee compound (Mostafa, 2008). Pauperisation has
caused number of female members of the AJMs workers’ household have started working as
domestic household workers (Ali, Ali & Sarkar, 2005). Some of them have ended up in taking
a profession of sex workers (Ali, Ali & Sarkar, 2005).
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Crystallising above arguments signify following issues; firstly: the constructed truth of neoliberal discourse involving efficiency argument based on global integration is not driven by
any goal of social and/or economic justice; such as rights to work, rights to have an identity
as formal work force and thus rights to enjoy their life-world. Similarly, whether the issue of
corruption is addressed is questionable. All the arguments to dismantle AJMs have been used
only to pursue the goal of bringing it within the control of the market centric global forces
(IMF, WB, WTO and MNCs etc.).
3. Conclusion
The aim of this paper is to deconstruct the discourse and its current manifestation: a loss
making public sector jute mills AJMs; and (un)making of a (un)viable EPZ as AEPZ. I have
drawn attention to its manifestation through exploration the implications of global integration
of economies; its institutionally produced illusions; how it forms the viability and validity of
its constructed truth. At policy level in local arena still there is gap in realising the produced
illusion of the concept of EPZs at the current context of financial crisis. In reality complying
with the norms of globalisation for the people marks their disappearance from the broader
social, political and economic scenario.
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Pinliang LUO*
Management School
Fudan University, China
[email protected]
Linhui YU*
School of Business
The University of Hong Kong, Hong Kong
[email protected]
Chong HAN
Management School
Fudan University, China
ONE-WAY CROSS-NETWORK EXTERNALITY AND
DETERMINANTS OF PAYMENT CARD USAGE IN CHINA
Abstract
In this paper, we look into the rapid expansion of China’s payment card industry in recent
years. Firstly, by employing Granger causality test, we find that the network externality across
merchants and cardholders in China’s payment card market is only one-way, in which
merchants are dominant in driving the growth of cardholders. Then, our deterministic
regression further shows that GDP of service sectors, size of banking and financial market,
household consumption and the concentration of acquirers all have positive impacts on the
demand of payment cards. However, GDP per capita and the concentration of issuers have
significant negative effects on card usage.
Key words: Payment Card Industry, Cross-network Externalities, Two-sided Market.
Acknowledgement: We gratefully acknowledge support from the New Century Excellent
Teacher Foundation (NECT-06-0361) of Ministry of Education of the People’s Republic of
China and Shuguang Program (07SG10) of Committee of Education of Shanghai, P.R.China.
* Contact authors
1. Introduction
The increasing importance of personal banking services in China has given rise to the golden
period of China’s payment card business in recent years. This market is regarded as the most
promising revenue source of commercial banks in the future. According to statistics, the
average annual growth rate of payment cards and Point of Sales (POS) in China are 46.8% and
21.3% during 1995 and 2005. As showed in Figure 1, both payment cards and POS terminals
were increasing quickly during the period from 1995-2005 in China. However, lots of
problems arise as a result of immature market environment, ill-formed operation modes and
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unreasonable industrial policies in China’s payment card industry. The well-known “BankMerchant Battle” that happened in 2004 is among one of the most typical examples.1
Payment car ds
POS t er mi nal s
450,000
1,200,000,000
400,000
350,000
300,000
800,000,000
250,000
600,000,000
200,000
150,000
400,000,000
POS terminals
Payment cards
1,000,000,000
100,000
200,000,000
50,000
0
0
19951996199719981999200020012002200320042005
Figure 1. The Number of Payment Cards and POS Terminals in China (1995-2005)
In network economics, payment card markets are typical two-sided markets. According to
Rochet and Tirole (2004), in a two-sided market, given the total amount of fees charged from
two types of users at each side of the market fixed, the fees structure, in other words, the
proportion paid by each side, will eventually affect each party’s willingness to participate in
the market and the total transaction amounts. Actually, in payment card industry network
access providers like CUP, VISA and MasterCard have considerable power to make
Interchange Fees (IF), which is key to profits allocation between issuers and acquirers.2 E.g.,
when a customer buys something in a shop and chooses to pay by his credit card, the issuing
bank then deducts the full price of transaction from the cardholder’s account but keeps IF as
its profit before transferring the rest of money to the acquiring bank. When the acquiring bank
receives the money, it keeps another small proportion, usually less than IF, and then gives
back the rest of money to the shop owner. Generally, different merchants have different IF
rates according to which types of business they involve in. In order to improve the efficiency
of payment card market, we should utilize the leverage of pricing strategies including IF,
customer annual fees, merchant discounts, etc.
1
In many cities of China, some big retail merchants joined up to boycott payment cards as they thought current
merchant discounts were too high to afford. It was ended up with the compromise of China Union Pay (CUP) by
cutting merchant discounts for some types of merchants. See reference [1] for details.
2
IF is a kind of fees paid by issuing banks to acquiring banks in card payment. It is set by network access service
provider like VISA and MC and aims to compensate issuing banks for their efforts in developing new customers,
so it is actually a kind of cross-subsidization between merchants and cardholders.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
According to Katz and Shapiro (1985), typical network industries like banking industry and
telecommunication industry are characterized by strong network externalities. It means that
the utility of customers using the network increase with the number of users using the same
network. Network externality emphasizes the size of user group and its effects on demand for
this product or service. Much complicated than simple network industries, two-sided markets
are economic networks having two distinct user groups that provide each other with network
benefits. Examples of two-sided markets include payment card market that is composed of
cardholders and merchants, operating system market that consists of end-users and developers,
tourism service with travelers and airlines as customers, and so on (Roson, 2005). Each “side”
of a two-sided market not only exhibits network externality and enjoys the economies of scale,
but also benefits from cross-network externalities. For example, customers prefer to use
payment cards (brands) accepted by more merchants, and merchants prefer to accept payment
cards (brands) used by more consumers. Therefore, cross-network externality implies that
demand for a product or service is not only affected by the number of users in the same group
but also depends on the number of users in the other group of the network platform.
Previous literatures have explicitly addressed the issues such as operation mechanism, pricing
strategy and anti-trust regulation of payment card industries, so we do not list them here. As to
the two-sidedness of payment card industry, Gowrisankaran and Stavins (2004), using ACH
panel data of US Federal Reserve Banks, tested the network externality of US banking
electronic payment system during 1995-1997. Rysman (2007), by examining the consumption
records of VISA cardholders and POS transaction records of merchants during 1998~2001,
found that there exists a positive feedback loop between consumer usage and merchant
acceptance. Loke (2007), using data from Malaysian banking industry, uncovered that
merchants background, their business types and expectations on other merchants had
influences on their preferences on acceptance of card payment. Huang (2006), in a similar
research on China’s payment card industry, investigated the correlation between the number of
credit cards users, the number of merchants with POS terminals and the sum amounts of
transaction, and recognized the existence of network effect and standardization effect in
China’s payment card market. However, he failed to estimate the magnitude of network
externality. Dong and Di (2007) also investigated the environment of China’s credit card
markets by surveys. Except for payment card market, Rysman (2004) studied the twosidedness of yellow pages market and found that network internalization significantly
increases the total surplus. Kaiser and Wright (2006) investigated magazines market in
Germany during 1972-2003 and eventually identified the strong cross-network externality in
this market.
In this paper, using yearly statistics of payment cards and POS terminals in China’s 15
commercial banks during 1995-2005, we firstly test the two-sidedness of China’s payment
card market. Then, we identify the determinants of payment card usage. Lastly, we come up
with some policy suggestions for further development of China’s payment card industry. The
rest of this paper is organized as follows. In chapter 2, we describe the data and variables. In
chapter 3, we identify the one-way cross-network externality in China’s payment card market.
In chapter 4, we investigate the determinants of payment card usage. Chapter 5 are
conclusions and policy implications of this paper.
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2. Data and Variables
The data we use are collected from China Statistical Yearbook (1995-2006) and Almanac of
China's Finance and Banking (1996-2006). The number of POS terminals installed every year
are used to measure the number of merchants who are willing to accept card payment.
Similarly, the number of payment cards issued in each year is used to measure the quantity of
payment card holders.
Table 1 is the description of variables we use for empirical analysis. POSI and CARDI are the
total number of POS terminals and payment cards at the industry-level, and posp and cardp are
the number of POS terminals and payment cards at bank-level. Table 2 shows the summary
statistics of variables in our regression model.
Table 1. Variables Description
Variables
Definition
POSI
Number of merchants
accepting card payment
Posp
CARDI
Number of POS terminals in China in 1995-2005
Number of POS terminals installed by each local bank in 1996~2005
Number of payment
cardholders
Cardp
GDP3
Data
Number of payment card issued in China in 1995-2005
Number of payment card issued by each local bank in 1995-2005
Indicators of economic
development
GDP of China’s tertiary industry (service sectors) in 1995~2005
CITYCON
Consumption level
Total consumption of urban residents in China in 1995~2005
FD
Financial Market
development
Market structure of
Payment card industry
Sum of savings deposits and loans in China in 1995~2005
GDPC
CHHI
POSHHI
GDP per capita of China in 1995~2005
HHI of issuing market (payment card) in 1995-2005
HHI of acquiring market (POS terminals) in 1995-2005
Table 2. Summary Statistics of Variables
Range
Min
Max
Mean
STD
GDP3(Billion RMB)
5345.44
1997.85
7343.29
4197.46
1739.94
GDPC(RMB)
FD(Billion RMB)
9057
37742.72
5046
10442.62
14103
48185.34
8557
25691.51
2819
12258.70
CITYCON(Billion RMB)
440.53
353.76
794.29
532.39
142.38
CARDI(Thousand)
945296
14114
959409
359741
321176
POSI(unit)
357803
48384
406187
240317
112985
3. One-way Cross-network Externality
According to Roson (2005), Given the existence of cross-network externality in payment card
market, the number of payment card users will affect the number of merchants willing to
accept card payment, and vice versa. Although we have shown the positive correlation
between the quantitative change of payment cards and POS terminals in Figure 1, it is still
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
unclear whether there exists the cross-network externality in China’s payment card market.3
Actually, what we most concern is whether there is a causal relationship between them. In
order to identify their underlying relationship, we employ Granger causality test (GC test).
Since GC test is only applicable for stationary time series, ADF test should be performed first
to assure the time series is stationary. The estimation equation used for ADF test is as follows.
∇yt = γ yt −1 + β1∇yt −1 + β 2∇yt −2 + .... + β p −1∇yt − p +1 +ε
Where, t is time, p is the number of period lagged. The ADF test results are shown in Table
3. Limited by relatively short periods of time series, we choose p = 1 . Time series variables
CARDI and POSI both pass ADF test, which implies that they are linear stationary series and
are applicable for GC test.
Table 3. Results of ADF Test
H0: CARDI has one unit root
Lag period: 0
ADF test
S.L
H0: POSI has one unit root
t-statistics
p-value
Lag period: 0
t-statistics
P-value
-7.27123
0.0002
ADF test
-6.270817
0.0007
1% level
-4.297073
5% level
-3.212696
10% level
-2.747676
S.L
1% level
-4.297073
5% level
-3.212696
10% level
-2.747676
Note: S.L refers to Significance Level.
Equation of GC test for variable CARDI and POSI is as follows.
CARDI = β0 + β1CARDIt −1 + ... + βkCARDIt −k +α1POSIt −1 +α2 POSIt −2 + ... +αk POSIt −k
POSI = β0 + β1POSIt −1 + ... + βk POSIt −k +α1CARDIt −1 +α2CARDIt −2 + ... +αkCARDIt −k
Where, t = 1, 2, 3,......,11 , and k=1. Table 4 shows the results of GC test. We can see that, at 90%
significance level, POSI has significant positive affect on CARDI, which implies that the
increase of total payment cards is subject to the increase of total merchants who accept card
payment. Then, we turn to look at POSI’s impacts on CARDI. Since p-value is only 0.15837,
we would rather accept the Null hypothesis: CARDI has no effect on POSI. Based on the
results of GC test, it can be inferred that causality does exist between two variables, which is,
the number of merchants who accept card payment affects the number of payment cards to be
used in the market. Therefore, this result indicates that the cross-network externality in
China’s payment card market one-way.
3
It is possible that this is a spurious correlation relationship commonly driven by some underlying factors.
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Table 4. Results of Granger Causality Test
Sample period: 1995—2005
Lag period: 1
H0:
Sample size
F-statistics
p-value
CARDI does not cause change of POSI
POSI does not cause change of CARDI
10
2.49288
4.06287
0.15837
0.08366
We further estimate the coefficient of the one-way cross-network externality using Fixed
Effect model. Since we accept the hypothesis that posp has significant positive effect on
cardp at 10% significance level, the regression specification is like this.
cardpit =C+β pospit + ε
Where, i = 1, 2,3,......,15 denotes bank, t = 1, 2, 3,......,10 denote year. Table 5 shows the estimation
results. The adjusted R-square of the regression is 0.992, which indicates that the model is
well fitted. The estimate of β is the elasticity of the one-way cross-network externality. It can
be seen that that 1% increase of POS terminals will contribute 0.876% increase of the payment
cards used in the market.
Table 5. Panel Data Fixed Effect Regression
Variables
Estimates
S.E
T-statistics
C
8.4228
0.4344
19.3862
Posp
0.8767
0.0510
17.1735
R-square
0.992
4. Determinants of Payment Cards Usage
Lots of factors can affect the usage of payment cards according to the literature. Firstly,
payment cards have broader application in developed countries, so the usage of it should be
closely related to economic status of a country or region. Therefore, we use GDP per capita
and GDP of service sectors to measure the economic status of China. Secondly, higher
consumption of households should drive higher demand of payment cards usage. So, we use
annual consumption of urban household in China to measure consumption level. Thirdly, we
employ the total saving deposits and loans in China to measure the market size of banking and
financial industry in China, which also impacts the demand of payment cards. Besides, we use
Herfindahl-Hirschman Index (HHI) to measure the intensity of competition because
competition status should play some roles in affecting the demand and usage of payment cards
as well. We distinguish HHI index of issuers and acquirers separately. The OLS regression
model is as follows.
CARDIt = c + α1POSIt +α2CHHIt +α3CITYCONt +α4 FDt +α5GDP3t +α6GDPCt +α7 POSHHIt +ε
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Where, the dependent variable CARDIt is the quantity of payment cards issued by all the banks
in year t , and the independent variables POSIt , CHHI t , POSHHI t , CITYCONt , FDt , GDPCt , GDP3t are
the quantity of POS terminals, HHI of issuers, HHI of acquirers, sum of household
consumption, total saving deposits and loans, GDP per capita and GDP of service sectors
respectively. We deflate GDPCt , GDP3t and FDt by CPI of year t . All variables are taken
logarithm to avoid possible non-stationarity and heteroscedasticity. The OLS regression
results are shown in Table 6.
Table 6. Results of Deterministic Regression of Payment Card Usage
Variable
Coeff. Est
S.E
t-statistics
p-value
CHHI
-3.691144
0.142312
-25.93703
0.0015
CITYCON
1.868503
0.038321
48.75964
0.0004
FD
0.650419
0.022999
28.28043
0.0012
GDP3
1.8652
0.06539
28.5243
0.0012
GDPC
-3.142325
0.052006
-60.42219
0.0003
POSI
0.85605
0.01141
75.02687
0.0002
POSHHI
2.592527
0.080833
32.07282
0.001
C
-6.241226
0.182968
-34.11109
0.0009
R2
0.97
Mean of Dependent variable
19.38727
Adjusted R2
SSR
0.97
S.D of Dependent Variable
1.058258
0.001528
AIC
-10.1394
SSE
4.67E-06
SC
-9.89731
LLR
58.69689
F-statistics
616848.6
Let us first look at the impacts of economic status on the number of payment cards.
Comparing to GDP per capita which has negative impacts on payment cards usage, GDP of
service sectors is statistically positive in explaining the usage of payment cards. This result is
easy to be understood because payment card business, which aims to serve individuals and
retail firms, should be closely linked to service sectors of a country. However, we find that
GDP per capital, which mostly consists of industrial output in China, have significant negative
effect on card usage. The reason is that GDP is composed of too many components and mostly
of them do not reflect the real need of payment cards usage. As to the total household
consumption and the size of banking and financial markets, their effects on the payment cards
usage are positive and significant, which is exactly in line with our expectation. When we look
at the coefficient estimate of CHHI, we find it is negative and significant, which implies that
the more intensive (smaller HHI) competition in issuing market, the faster rise of payment
cards usage. Contrast to CHHI, the coefficient estimate of POSHHI is positive and significant,
which tells us that less competition between acquirers is favorable for the increase of payment
cards usage. This finding is also reasonable because acquiring services enjoy the economies of
scale, so monopolistic structure is more advantageous in reducing the costs of POS installation
and usage. Besides, high concentration of acquiring market is also favorable for the
191
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
enhancement of acquirers’ bargaining power in competing for a lower Interchange Fees.
Actually, due to the existence of the one-way cross-network externality in China’s payment
card market, the increase of merchants accepting card payment will ultimately pass on to the
cardholders, thus lead to increasing usage of payment cards.
5. Conclusions and Policy Implication
In this paper, we find the existence of one-way cross-network externality in China’s payment
card market. We also explore the determinants of payment card usage in China. There are two
main conclusions of this paper. Firstly, growth of merchants group ultimately dominates the
performance of China’s payment card market. It means that comparing to the booming of
issuing market acquiring market has been the “bottleneck” of the whole industry. The
inadequate POS terminals in China limit the usage of payment cards. Actually, the current IF
structure depresses the incentives of acquirers and merchants in involving in card payment.
Secondly, we find GDP of service sectors, the size of banking and financial market, household
consumption and the concentration of acquirers have significant and positive impacts on
payment cards usage, while GDP per capita and the concentration of issuers have significant
negative effects on card usage.
The conclusions of this paper have following policy implications. First of all, it is urgent that
the acceptance environment of payment cards in China should be further improved. Except
that more efforts should be put to encourage merchants to use POS terminals, IF structure
should also be optimized so that merchants can benefit more from accepting card payment and
thus they have enough incentive to do so. Actually, issuers should try to make more money
from cardholders instead of merchants, say, charging moderate annual fees for cardholders, or
saving issuing costs, etc. In addition, one or more network access service providers should be
established in order that the IF structure is efficient enough through competition. Finally,
considering the economies of scale in acquiring market, government should also encourage
mergers and acquisitions between current acquirers. By doing so, merchants will enjoy lower
costs of accepting card payment. Besides, it is also essential for issuers to avoid price wars and
try to increase value-added through brand effect and professional services.
References
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Bank card Industry. Studies of International Finance, (1): 39~46.
Dong Weigang, Zhang Xinzu (2007). Characteristics and Anti-trust Puzzles of Bank Card
Industry. Quantitative and Technical Economics Studies, (6): 111~119.
Dong Zhiyong, Di Xiaojiao (2007). Multivariate Statistical Analysis of Credit Card Users in
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Gowrisankaran, Gautam, Joanna Stavins (2004). Network Externalities and Technology
Adoption: Lessons from Electronic Payments, Rand Journal of Economics, 35(2): 260~276.
Huang Chunchun (2006). Standard of Credit Card and Banking Competition: Analysis Based
on Network Economics. Financial Studies, (5):70~80.
Hunt, R.M (2003). An introduction to the Economics of Payment Card Networks. Review of
Network Economics, 2(2):80~96.
Katz Michael, Carl Shapiro (1985). Network Externality, Competition and Compatibility.
American Economic Review, (2): 424~440.
Kaiser U, Wright J (2006). Price Structure in Two-sided Markets: Evidence from the
Magazine Industry. International Journal of Industrial Organization, 24(1):1~28.
Loke,YJ (2007). Determinants of Merchant Participation in Credit Card Payment Schemes.
Review of Network Economics, 6(4):474-494.
Luo Pinliang, Linhui Yu (2006). Analyses of Equilibrium Interchange Fees in POS Payment
System and Policy Implications. Studies of Industrial Economics, (4): 28~34.
Luo Pinliang, Zhiyuan He (2005). Economic Analysis of Bank-Merchant Battles in China.
Shanghai Management Science, (2):20~23.
Negrin, J.L (2005). The Regulation of Payment Cards: The Mexican Experience. Review of
Network Economics, 4(4): 243~265.
Rysman, M (2007). An empirical Analysis of Payment Card Usage, The Journal of Industrial
Economics, 55(1): 1~36.
Rysman, M (2004). Competition between Networks: A study of the Market for Yellow Pages.
Review of Economic Studies, 71(2): 483-512.
Rochet J-C, Jean Tirole (2003). An Economic Analysis of the Determination of Interchange
Fees in payment Card Systems. Review of Network Economics, 2(2): 69~79.
Rochet, J, J Tirole (2004). Two-sided Market: an overview. IDEI University of Toulouse, 134.
Rochet, J-C (2003). The Theory of Interchange Fees: A Synthesis of Recent Contributions.
Review of Network Economics, 2(2): 97~124.
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Rochet, J, J Tirole (2002). Cooperation among Competitors: Some Economics of Payment
card Associations. RAND Journal of Economics, (3): 549-570.
Roson, Robert (2005). Two-sided Market: a Tentative Survey. Review of Network
Economics, (2): 142-160.
Schmalensee, R (2002). Payment Systems and Interchange Fees. Journal of Industrial
Economics, , 50: 103~122.
Wu Yunliang, Yue zhonggang (2008). A Theoretical and Empirical Research on Transaction
Pricing of Bank Card Industry. Economic Management, (12): 54~60.
Yue Zhonggang (2006). Pricing Strategies and Anti-trust of Two-sided Market. Financial
Issues Studies, (8): 31~35.
194
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Roman ANGELA
Business Administration Department
„Al. I. Cuza” University of Iaşi, Romania
[email protected]
Anton Sorin GABRIEL
Business Administration Department
„Al. I. Cuza” University of Iaşi, Romania
[email protected]
ACCELERATED DYNAMICS OF CREDIT IN SELECTIVE COUNTRIES FROM
CENTRAL, EASTERN AND SOUTH-EASTERN EU MEMBER STATES AND
IMPLICATIONS OF THE CURRENT FINANCIAL CRISIS
Abstract
The aim of the paper is to highlight the accelerated dynamics of credit activity conducted by
credit institutions in some countries of Central, Eastern and Southeastern EU member States.
In the paper, we propose relief to the common features and also the differences that arise
between countries, in terms of level and especially the structure of credit activity. The
significant transformations of the credit activity in the countries under study are highlighted
through the use of statistical data, which allow us to illustrate the progresses and implications
of occurred risks in terms of macroeconomic stability and in particular financial stability. The
current international financial crisis has determined the decrease of the rate of growth of
credits and even halting lending in some countries, which entailed significant intensification of
the concerns of national and international authorities in adopting urgent measures in order to
restore the stability of the economies and to resume the credit activity. In devising measures to
restore normal functioning of the financial system, monetary authorities have taken account of
the particularities of the financial system in every country. In the countries analyzed in the
paper, financing the real economy is dominated by banks so that the measures taken by central
banks focused on the banking sector and have sought to ensure its normal operation and
support bank lending to economic agents and households. However, in determining the actions
to be taken in order to restore the health of the financial system, central banks have taken into
account the expectations on inflation rate, but in the same time, they remain firmly anchored
to the objective of monetary policy to ensure price stability. Such behavior of central banks
show that price stability is necessary even during periods of financial instability.
Keywords: Credit institutions, Lending structure, Loans granted households.
195
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
1. Introduction
As a consequence of the restructuring and privatization process, the alignment of banking
legislation to European legislation requirements, diversification of products and services
portfolio offered by the banks, the banking sector of the Central, Eastern and South-Eastern
European countries registered in the last decade a significant consolidation and represents
nowadays the most important component of the financial system.
The dominant position of the banking sector within the financial system of the Central,
Eastern and South-Eastern European countries is illustrated by the banking assets that hold, on
an average, 70% of the total assets of the financial system. As a matter of fact, the financial
system of all the European Union member states is centered on banking financial
intermediaries. In this respect, it is estimated that the stability and the efficiency of banking
sector is an essential precondition for sustainable economic development of the states and, at
the same time, for providing a good running of the nominal and real convergence process.
Likewise, a solid and competitive banking sector allows the efficient transmission of monetary
policy signs towards the real economy and, thus, contributing to achieve the basic objective of
the central banks of the surveyed countries and namely, the provision and maintenance of
price stability.
The financial system structure in the case of the considered countries can be followed based
on figure 1. The data illustrated in figure 1 shows, on one hand, the dominant position of the
banking sector within the financial system and, on the other hand, the fact that although the
non-banking financial institutions hold a reduced share of the total assets of the financial
system, in recent years they recorded a fast increase (mainly, the insurance companies, the
investment funds and leasing companies). Such an evolution is due to the macroeconomic
stabilization, structural changes within the non-banking sector, as well as to the measures
taken by monetary authorities, mainly in Romania and Bulgaria in order to limit the increase
of bank credits that engaged the increase of the credits given by non-banking financial
institutions, especially by the leasing companies.
Figure 1: The structure of financial system in selective countries from Central, Eastern and SouthEastern Europe in 2008 (in % of total assets of financial systems)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Other non-bank financial
corporations
Inves tm ent com panies ,
inves tm ent and m utual
funds
Ins urance com panies
S
lo
va
ki
a
S
lo
ve
ni
a
R
om
a
ni
a
Li
th
ua
ni
a
C
ze
ch
R
ep
ub
lic
Banks
Source: Restructured data after national central banks.
196
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Our paper is structured as following: the second section highlights the changes produced in the
banking sector from some countries of Central, Eastern, and Southeastern Europe, emphasized
through the EBRD indicator, the presence of foreign banks, and the process of banking
consolidation. The third section analyses the transformations registered in the credit activity of
the credit institutions through the dynamics and the structure of the loans granted to
nonfinancial corporations and to households. Also, in this section, we intend to highlight the
factors that have determined the accelerated dynamics of credit, especially the one granted to
households, but also the implications in terms of macroeconomic stability. The study ends
with conclusions.
2. The Reform of the Banking Sector and Structural Changes in the Countries of
Central, Eastern and South-Eastern Europe
Transformations in the banking systems of the countries of Central, Eastern and South-Eastern
Europe taken in the analysis may be evidenced by a synthetic indicator calculated by the
European Bank for Reconstruction and Development (EBRD), the assessment of banking
reform and liberalization of interest rates. This indicator measures the degree of reform of the
banking sector by liberalizing interest rates and the allocation of credit, the lending to the
private sector, private ownership of the banking sector, the level of competition between
banks, banks' solvency, the implementation of a regulatory framework and prudential
supervision. The indicator values are between 1 and 4+ and have the following meaning: the
value of 1 signifies reduced progress in the reform process, and the 4+ reflects a full
convergence with international standards and performance of advanced industrial economies,
a full convergence of banking laws and regulations with BIS standards, and a full range of
banking services (EBRD, 2006).The reform of the banking systems of the countries taken in
the analysis, revealed the EBRD indicator, may be pursued based on data in Table 1.
Table 1: Assessment reform the banking system based on the EBRD index,
in some countries of Central, Eastern and South-Eastern Europe in the period 1990–2008
Country
1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008
Bulgaria
1.0 2.0 3.0 3.0 3.3 3.3 3.67 3.67 3.67 3.67 3.67
Czech Republic 1.0
3.0
3.3
Estonia
Hungary
Latvia
Lithuania
Poland
Romania
Slovenia
Slovak Republic
3.0
3.0
3.0
3.0
3.0
3.0
3.0
2.7
3.7 3.7 3.7 3.7
4.0 4.0 4.0 4.0
3.0 3.3 3.7 3.7
3.0 3.0 3.0 3.3
3.3 3.3 3.3 3.3
2.67 2.67 2.67 2.67
3.3 3.3 3.3 3.3
3.0 3.3 3.3 3.3
Source: EBRD, 2008.
1.0
1.0
1.0
1.0
2.0
1.0
1.0
1.0
3.67 3.67 3.67 3.67 4.0
197
4.0
4.0
3.7
3.3
3.3
3.0
3.3
3.7
4.0
4.0
3.7
3.7
3.67
3.0
3.3
3.7
4.0
4.0
NA
4.0
4.0
3.7
3.7
3.67
3.0
3.3
3.7
4.0
4.0
4.0
3.7
3.67
3.3
3.3
3.7
4.0
4.0
4.0
3.7
3.67
3.3
3.3
3.7
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
The transition indicator’s values, computed by EBRD, highlight, on one hand the fact that all
analyzed countries have registered significant progresses in the banking sector reform, and, on
the other hand, for all countries (except Hungary, Estonia, and Latvia, where the transition
indicator has the maximum value of 4+) there are still improvement possibilities. The lower
score obtained by Slovenia and Romania (3,3% for the year 2008 by comparison with 3,67%
in the case of Bulgaria and Poland) is due to the slowly rhythm of the reform process.
A fundamental characteristic of reform in the analyzed countries is privatization, which was
completed in a large number of countries and which has deeply affected the structure of bank
ownership (see the data in table 2). This led to a significant decrease of shares owned by banks
with state-owned majority capital in favor of the banks with private majority capital, that is
foreign capital, especially in Romania – from 14.1% to 2.1%). By comparison, in Slovenia and
in Poland, banks with state-owned majority capital hold for the moment the biggest part of the
market. Bank privatization sectors was considered the most important way through which
foreign banks could step into the bank markets of Central, Eastern and South-Eastern
European countries. In this context, it is to be mentioned the most important privatization
made until now in Central and Eastern Europe, that is the selling of the Commercial Bank of
Romania at the end of 2005 to Erste Bank AG, which has determined in Romania the
significant increase of the percentage of assets held by the banks with foreign majority capital
out of the total assets of the banks, from 59.2% at the end of 2005 to 87.3 % at the end of
2007.
Table 2: Asset shares of state-owned banks and foreign-owned banks1,
in some countries in Central, Eastern and South-Eastern Europe in the period 2002 – 2007
Country
2002
(1)
Bulgaria
14.1
Czech Republic 4.6
Estonia
0.0
Hungary
10.7
Latvia
4.0
Lithuania
0.0
Poland
26.6
Romania
43.6
Slovenia
13.3
Slovak Republic 1.9
2003
2004
2005
2006
(2)
(1) (2) (1) (2) (1)
(2)
(1)
75.2
2.5 82.7 2.3 81.6 1.7
74.5
1.8
85.8
3.0 86.3 2.9 84.9 2.5
84.4
2.2
97.5
0.0 97.5 0.0 98.0 0.0
99.4
0.0
85.0
7.4 83.5 6.6 63.0 7.0
82.6
7.4
42.8
4.1 53.0 4.0 48.6 4.3
57.9
4.4
96.1
0.0 95.6 0.0 90.8 0.0
91.7
0.0
70.7
25.8 71.5 21.7 71.3 21.5
74.3
21.1
52.9
40.6 54.8 7.5 58.5 6.5
59.2
5.9
16.9
12.8 18.9 12.6 20.1 12.0
22.6
12.5
84.1
1.5 96.3 1.3 96.7 1.1
97.3
1.1
(1)- Asset shares of state-owned banks in per cent
(2)- Asset shares of foreign-owned banks in per cent
Source: EBRD, 2008.
1
(2)
80.1
84.7
99.1
82.9
63.3
91.8
74.2
87.9
29.3
97.0
2007
(1)
2.1
2.4
0.0
3.7
4.2
0.0
19.5
5.7
14.4
1.0
(2)
82.3
84.8
98.7
64.2
63.8
91.7
75.5
87.3
28.8
99.0
Asset share of state-owned banks (in per cent). Share of majority state-owned banks’ assets in total bank sector assets. The
state includes the federal, regional and municipal levels, as well as the state property fund and the state pension fund. Stateowned banks are defined as banks with state ownership exceeding 50 per cent, end-of-year. Asset share of foreign-owned
banks (in per cent) - share of total bank sector assets in banks with foreign ownership exceeding 50 per cent, end-of-year.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
In 2007, the foreign banks prevail mostly in the Slovak Republic, Estonia, Lithuania,
Romania, the Czech Republic and Bulgaria (see data in table 2 and figure 2). In these
countries, foreign banks are the leading actors on the domestic bank markets, hence their
behavior influences greatly the bank crediting operations and generally the level of financial
mediation. In comparison to the mentioned countries, the percentage of the foreign capital is
much lower especially in the Slovak Republic (only of 28.8% at the end of 2007), where, on
the one hand, banks with state-owned majority capital have for hold a significant percentage
of the market (14.4% at the end of 2007), and on the other hand, the private capital which is
mostly domestic.
Asset shares of foreign-owned banks in percent
Figure 2: Asset shares of foreign-owned banks2
in selective countries from Central, Eastern and South-Eastern in the period 2002 – 2007
100,00
90,00
Bulgaria
80,00
Czech Republic
70,00
Estonia
60,00
Hungary
Latvia
50,00
Lithuania
40,00
Poland
30,00
Romania
20,00
Slovenia
Slovak Republic
10,00
0,00
2002
2003
2004
2005
2006
2007
Source: EBRD, 2008.
Banking sector in the countries of Central and Eastern Europe is dominated by banks from
Western Europe, especially the Austrian banks (Erste, Raiffeissen), French (Société Générale),
Italian (UniCredit, Intesa), German (Commerzbank, BayernLB) and Dutch (ING), which is
shown in table 3. In the Baltics, the banking sector is dominated by five large Scandinavian
banking groups (Swedbank Group, SEB Group, Nordea Group, DnB NOR Bank ASA Group,
Danske Bank Group) which reached in 2008 more than 84% of the total credit market and
earned over 92% of the profit of the entire banking system in Lithuania (Bank of Lithuania,
Financial Stability Report, 2009).
2
Asset share of foreign-owned banks (in per cent) Share of total bank sector assets in banks with foreign
ownership exceeding 50 per cent, end-of-year.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Table 3: Involvement of Western Banks
in the Countries of Central, Eastern and South-Eastern Europe in 2008
Country
Main foreign banks
Bulgaria
UniCredit, OTP, Raiffeisen
Czech Republic
KBC, Erste, Société Générale
Estonia
Swedbank, SEB, Nordea
Hungary
KBC, BayernLB, Intesa
Latvia
Swedbank, SEB, DnB NOR Bank ASA group
Lithuania
SEB, Swedbank, DnB Nord
Poland
UniCredit ING Commerzbank
Romania
Erste Société Générale Raiffeisen
Slovenia
Société Générale Intesa UniCredit
Slovak Republic
Erste Intesa Raiffeisen
Source: Centre for Eastern Studies, 2009.
In specialized literature (Hryckiewicz, 2008) tackling the banks with international operations,
there are several factors which are very important for the selection of the location, such as: the
potential of bank market from the host country, the legislation of the country of origin,
economic growth rates of the origin and host country and the headquarters of the foreign bank.
In the case of the Central, Eastern and South-Eastern Europe countries which were taken into
account for our study project, foreign banks were interested to extend their operations
especially because of the high economic growth of bank markets in those countries , the low
financial mediation and the high level of interest rate.
From the point of view of the host country, this is interested in attracting the interest of
foreign banks as they may contribute to the enhancement of stability, reliability and
competitiveness of the banking sector, to the significant improvement of the banking practices
further to the numerous advantages created, such as: better bank-risk management, bank
product quality, range and price improvement, the enhancement of the efficiency of the
banking operations further to the know-how added, technology and liquidities included, the
facilitation of the access to foreign financing for the companies and the individuals of the host
country.
Furthermore, foreign banks may contribute to the enhancement of the private sector crediting
in the host country, on the one hand, because they are not restricted by the conditions on the
domestic market, and on the other hand because of the easy access to financing on the
international financial markets, based on the reputation of the mother bank (Burcu, 2008).
Besides these advantages, the presence of the foreign banks also presents certain limitations,
the most important being the exposure of the host country to a high contagion risk. This is
because the financial difficulties of the mother bank that take place when the origin country is
in recession may affect their branches abroad. On the other hand, significant macroeconomic
unbalances in the host country may determine the withdrawal of the foreign bank capitals or
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
the renunciation of the mother banks to the financial support of their branches, with serious
consequences, particularly in the financial stability of that country.
Another mutation that occurs in the structure of the bank sectors in all Central, Eastern and
South-Eastern European countries is the intensification of bank reinforcement, seen in the
increase of the number of banks (see the data in table 4). If in the case of some countries,
mostly the Czech Republic, Bulgaria and Hungary, we see a significant diminishing of the
number of banks, in the case of other countries such as Estonia, Latvia, Lithuania, and
Romania we witness a divergent tendency, the number of banks increasing.
Against the background of banking reinforcement, it is worth noting that the decrease of the
number of credit institutions was the result of numerous mergers and purchases and less the
effect of bank going bankrupt.
Table 4: The evolution of number of credit institutions in different countries
in the period 2003 - march 2009
Country
Number of credit institutions
2003 2004 2005 2006 2007 2008 2009 Q1
Bulgaria
35
35
34
32
29
30
30
Czech
77
70
56
57
56
54
54
Republic
Estonia
7
9
11
14
15
17
17
Hungary
222
217
214
212
206
204
198
Latvia
23
23
25
18
31
34
33
Lithuania
71
74
77
77
80
84
84
Poland
660
744
730
723
718
712
713
Romania
39
40
40
39
42
45
44
Slovenia
33
24
25
25
27
25
26
Slovak
22
21
23
24
26
26
26
Republic
MU
6623 6427 6271 6157 6128 6570 6550
EU
9054 8908 8689 8514 8348 8525 8465
Note: PL data for the number of credit institutions include credit unions since 2004, whereas previously
it included only commercial and cooperative banks.
Source: ECB, 2008 and Bank of Slovenia.
The transformation of the structure of the bank system in the studied countries may be shown
in the significant extension of the bank unit network (although in most countries the number of
bank decreased), which shows that banks want to conquer as many market segments as
possible and to provide quality products and services in order to attract customers and to make
them loyal.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Table 5: The evolution of number of local units (branches)/credit institution
in different countries in the period 2003 – 2007
Country
Number of local units (branches)
Number of local units
(branches)/credit institution
2003
2004
2005
2006
2007 2003 2004 2005 2006 2007
BG
NA
5606
5629
5569
5827
NA 160 165 174 200
CZ
1670
1785
1825
1877
1862
21
25
32
32
33
EE
197
203
230
245
266
28
22
20
17
17
HU
3003
2987
3125
3243
3387
13
13
14
15
16
LV
581
583
586
610
682
25
25
23
21
22
LT
723
758
822
892
970
10
10
10
11
12
PL
8688
8301
10074 10943 11607
13
11
13
15
16
RO
3387
3031
3533
4470
6340
86
75
88
114 150
SI
725
706
693
696
711
21
29
27
27
26
SK
1057
1113
1142
1175
1169
48
53
49
48
44
MU13 168730 168476 169644 181499 183981 25
26
27
29
30
EU27
206956 211442 214925 228601 233581 22
23
24
26
27
Source: data processed based on ECB, 2008.
The number of local units or branches per bank increased significantly (see the data in table
5), especially in Romania from 86 local units in 2003 to 150 in 2007, the level being 5 times
higher in comparison to the EURO area. Furthermore, in Romania the highest rise of the
number of local units was recorded, by 41.8% in 2007 in comparison to 2006. These
evolutions were recorded against the background of the significant extension of the banking
mediation and of the banking retailing operations. Nevertheless, when we consider the bank
density expressed by the number of crediting institutions to 100 000 inhabitants, the level we
have in Romania, kept relatively constant, is under the level of the other states and mostly
under the level of MUI3 and EU27 (see the data in table 6).
Table 6: The evolution of the ratio bank density in different countries in the period 2003-2007
Country
2003
2004
2005
2006
Bulgaria
0.45
0.45
0.44
0.42
Czech
0.76
0.69
0.55
0.56
Republic
Estonia
0.52
0.67
0.82
1.04
Hungary
2.19
2.15
2.12
2.11
Latvia
0.99
0.99
1.09
1.22
Lithuania
2.06
2.15
2.29
2.29
Poland
1.73
1.95
1.91
1.90
Romania
0.18
0.19
0.19
0.18
Slovenia
1.65
1.20
1.25
1.24
Slovak
0.41
0.39
0.43
0.45
Republic
MU13
2.12
2.05
1.99
1.94
EU27
1.86
1.82
1.77
1.72
Source: data processed based on ECB, 2008.
202
2007
0.38
0.54
1.12
2.05
1.36
2.37
1.88
0.20
1.33
0.48
1.92
1.68
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
The enhancement of bank reinforcement in the Central, Eastern and Southeastern European
countries also has effects on the bank market concentration, measured by the ratios Herfindahl
– Hirschmann and the market share of the first 5 crediting institutions (see the data in table 7).
In the case of all the studied countries, we can see a tendency of decreasing the bank market
concentration that, next to the increase of the number of banks with foreign-owned majority
capital may be perceived as signs of enhancement of bank competitiveness. Furthermore, it is
worth mentioning the situation in Poland where the concentration degree is much lower (in the
case of both indices) in comparison to other countries, which means a higher competitiveness
on the banking market. In all countries (except for Poland) including in EU27 and the
Monetary Union, the first 5 credit institutions hold more than 50% of all banking assets.
A particular case appears in the banking system of Estonia, which records the highest
concentration index (see table 7). In this direction, it is worth mentioning that two subsidiaries
of the Swedish banks - Swedbank and Skandinaviska Enskilda Banken (SEB) - hold 68% of
the banking sector assets (IMF, Country Report, Republic of Estonia, 2009).
Table 7: The evolution of the concentration index of banking market
in different countries in the period 2003 – 2007
Country
Herfindahl* Index
Weight of the 5 leading credit
institutions in the total assets
2003
2004 2005 2006 2007 2003 2004 2005 2006 2007
Bulgaria
NA
721
698
707
833
NA
52.3 50.8 50.3 56.7
Czech
11187 1103 1155 1104 1100 65.8 64.0 65.5 64.1 65.7
Republic
Estonia
3943
3887 4039 3593 3410 99.2 98.6 98.1 97.1 95.7
Hungary
783
798
795
823
839
52.1 52.7 53.2 53.5 54.1
Latvia
1054
1021 1176 1271 1158 63.1 62.4 67.3 69.2 67.2
Lithuania
2071
1854 1838 1913 1827 81.0 78.9 80.6 82.5 80.9
Polonia
754
692
650
599
640
52.0 50.0 48.5 46.1 46.6
România
1251
1111 1115 1165 1041 55.2 59.5 59.4 60.1 56.3
Slovenia
1496
1425 1369 1300 1282 66.4 64.6 63.0 62.0 59.5
Slovak
1191
1154 1076 1131 1082 67.5 66.5 67.7 66.9 68.2
Republic
MU13
579
599
642
630
654
40.5 41.6 42.6 42.8 44.1
unweighted 983
997
1029 996
1006 54.2 54.2 54.9 54.4 54.7
avg.
EU 27
545
567
600
588
628
39.7 40.9 42.1 42.1 44.4
unweighted 1145
1114 1135 1104 1102 58.8 58.5 59.3 58.9 59.4
avg.
* calculated as the sum of the square of the market shares
for all credit institutions in a Member State
Source: ECB, 2008.
203
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
3. The Banking Intermediation, the Lending Structure and their Implications
A significant sign of progress recorded by the banking sectors of Central, Eastern and SouthEastern European countries is represented by the increase of financial intermediation degree
expressed both in the light of banking assets share of GDP and in the light of banking credits
share of GDP (see the data of figure 3). Such an evolution reflects the significant orientation
of credit institutions to the real economy and their return to the financial intermediation
function.
The significant remaking of the financial intermediation process, mainly in Bulgaria and
Romania (see the data of figure 3) was determined by the changes occurred at the offer level
and at banking credits demand.
The increase of banking credits offer was determined by the decrease of crediting risk of the
real economy based on the improvement of macroeconomic conditions (the decrease of
inflation rate, of interest rate, national currency appreciation), the existence of a liquidity
excess in the banking sector and also by the competition increase on the banking market
following foreign capital entries). Likewise, the increase of banking credits offer was
sustained by the creation of credit offices, by improving the credit guarantee regulations, by
improving the banking legislation, of audit and accounting practices.
Regarding the credit demand, it increased as a consequence of improving the macroeconomic
conditions (decrease of inflation rate, of interest rates, economic growth acceleration), the
initial lowered indebting degree of population and increasing of its income (Sirtaine, 2007).
Based on the data shown in figure 3, we may find out that of the surveyed countries, Slovenia,
Estonia and Hungary have the highest degree of financial intermediation, and, at the opposite
side, there is Romania that, although recorded remarkable progresses on the financial
intermediation level, is under the level of the other countries and well below euro zone
average. At the end of 2008, the financial intermediation degree measured by the share of
banking assets of GDP was of 262.3% of euro zone (Raiffeisen Research, 2009). Such a
situation shows that the Romanian banking market features a great growth potential. The
significant difference between the financial intermediation degree in Romania and EU25, for
example, is considered as normal if we take into account the GDP per capita that is much
below the average of EU 25. In this respect, it is worth mentioning that, in Romania, at the end
of 2008, the GDP per capita expressed at the purchasing power parity was at only 43.5% of
EU25 average (National Bank of Romania, 2008b).
204
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Figure 3: Evolution of financial intermediation
(bank assets/GDP in %) in different countries in the period 2004-2008
Bank assets/GDP in percent
140,00
120,00
100,00
80,00
60,00
2004
40,00
2008
20,00
0,00
Bulgaria
Czech
Estonia
Hungary
Poland
Romania
Slovenia
Republic
Slovak
Republic
Source: Raiffeisen Research, 2009; national central banks.
The loans granted to the economy by the credit institutions (to the non-financial corporations
and to the households) have recorded an accelerated rise, especially in the Baltic countries,
followed by Romania and Bulgaria (see the values in table 8), evolution justified by the initial
very low levels of financial intermediation and by its convergence process towards the levels
of EU developed countries.
The fast increase of banking credits in the Central, Eastern and South-Eastern European
countries was financed by the significant entries of foreign capital in the banking sectors,
stimulated by the high differential of positive interest and by the anticipation of a real
appreciation on the long run of the currencies of the respective countries (Isărescu, 2008).
Country
Bulgaria
Czech
Republic
Estonia
Hungary
Latvia
Lithuania
Poland2
Romania
Slovenia
Slovak
Republic
Table 8: Evolution of loans granted to the economy of credit institutions
in the period 2005 – 2008 (growth in % year on year in domestic currency terms)
Growth in loans granted
Growth in loans granted to households1
to non-financial corporations
2005
22.34
14.33
2006
19.40
20.08
2007
72.43
17.09
2008
32.32
14.08
2005
58.39
32.27
2006
30.55
29.28
2007
52.35
34.40
2008
31.30
21.15
62.02
11.4
47.46
42.95
2.72
32.30
22.5
22.0
59.18
12.68
52.47
41.26
14.19
43.22
24.8
21.5
30.96
14
36.30
36.74
23.37
46.81
35.9
24.1
5.94
4.5
16.87
15.79
28.80
29.68
18.30
13.1
70.0
31.07
84.19
90.50
21.92
79.98
28
42.1
63.15
31.29
75.52
65.99
33.02
83.76
24.1
32.5
33.96
31
39.17
58.07
37.72
82.09
27.1
28.5
10.85
20.97
6.91
20.58
44.30
38.74
14.80
25.5
1
including non-profit institutions serving households
2
loans granted of monetary financial institutions
Sources: national central banks.
205
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Analyzing the dynamics of the banking credits depending on the beneficiaries (non-financial
corporations and households) it is found out a faster increase of the credits given to
households in all the surveyed countries, except Bulgaria where the increase of credits given
to the corporate sector surpassed, at the 2007 level, the credits given to households (see the
data of table 8).The significant expansion of credits given to households points out the large
increase of credit demand for houses, consumer credits but also the strategies of the credit
institutions acquiring new market quotas by attractiveness and diversity of credit offers. Such
an evolution was determined by interest rate reduction, the increase of population incomes,
need of improving the endowment degree of the houses and consumer durables, as well as
significant orientation of the credit institutions to crediting the households and competition
increase between banks on the retail segment. The share of loans granted to households in
relation to GDP, for some countries, can be observed in the figure 4. From the analyzed
countries, Romania holds the last place, which reflects the existence of a growth potential for
the household credit.
Figure 4: Household credit in selective countries from
Central, Eastern and South-Eastern Europe in 2007 (as % of GDP)
Household credit/GDP
60
50
40
30
Household credit/GDP
20
10
S
lo
ve
ni
a
E
ur
o
Zo
ne
P
ol
an
d
La
tv
ia
E
st
on
ia
H
un
ga
ry
R
ep
ub
lic
B
ul
ga
ria
C
ze
ch
R
om
an
ia
0
Source: National Bank of Romania, 2008(c).
The dynamics of banking credits given to households are significantly sustained by the house
credits that, in some countries, especially in Romania, Bulgaria and Poland, at the 2007 level,
recorded a more important increase compared to consumer credits (see the data of table 9). In
these countries, the housing loans have become the most important banking products from the
retail segment.
206
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Table 9: Evolution of the loans granted to households by the credit institutions
in the period 2006 – 2008 (in % year on year)
Country
Growth in loans
Growth in loans
Other loans to
for housing purchase
for consumer credit
households
Bulgaria
Czech
Republic
Estonia
Hungary
Latvia
Lithuania
Poland
Romania
Slovenia
Slovak
Republic
MU 13
2006
74.06
40.07
2007
64.25
42.06
2008
38.05
20.14
2006
50.03
37.71
2007
49
30.22
2008
29.85
22.85
2006
31.08
30.20
2007
26.83
33.64
2008
5.86
25.53
63.26
18.82
86.17
60.19
55.57
184
42.98
45.27
31.59
15.68
44.39
61.86
59.88
81
36.50
33.33
10.37
24.58
7.31
24.87
64.88
47.25
27.25
26.1
89.29
61.23
63.53
68.25
24.15
85.70
7.07
27.54
48.11
39.82
21.48
43
35.98
65.36
19.94
18.71
7.13
40.73
1.1
19.37
17.95
33.74
5.14
23.91
33.68
17.37
33.47
113
14.87
70.13
19.75
83.64
39.37
1.38
25.08
58.07
41.35
200
23.73
33.13
21.46
12.04
-0.47
5.98
35.76
109
10.02
22.30
12.51
6.93
1.62
7.49
4.93
2.29
2.89
1.87
2.27
Source: national central banks and data processed based on ECB,2008.
The significant dynamics of the housing loans was determined by the ratio between supply and
demand. Regarding the credits demand for housing, its increase has been determined
especially by the increasing of the population’s income, and also of housing price.
In specialized literature (Zoltan Walko, 2008) it is highlighted the existence of an
interconditioning relationship between the volume of housing loans and the housing price. For
example, the increase of the demand for housing loans and of their volume has engaged a
significant increase of the housing price. On the other hand, a higher housing price mounts the
collateral value, which allows the acquiring of a higher credit volume.
Regarding the housing credit supply, its increase was determined by the competition growth
on this market segment, caused by the entries of foreign banks, the lower risk presented by the
housing credits (they are collateralized through the mortgage), the banks possibilities for
obtaining a higher profit and the improvement of the institutional framework. The accelerated
growth of the volume of housing credits had positive effects through the improvement of
living conditions for the population, the development of the constructions sector, but has also
engaged the appearance of risks in terms of financial stability. The higher share of housing
credits denominated foreign currencies, especially in Estonia, Latvia, and Romania, has
exposed the households to the risk of devaluation of national currency, but also to risk of
increase of interest rate. In this context the monetary authorities have adopted various
measures to ensure financial stability. For example, the National Bank of Romania has
increased the provisioning coefficients for the credits denominated foreign currencies or for
the credits indexed based on the exchange rate.
207
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
The structure analysis on destinations of credits given to households (see the data of table 10)
illustrates the existence of some discrepancies between the countries. In this respect, it is
worth mentioning the situation of Romania, where, at the 2007 level, although house credits
recorded the most important increase, they hold a more reduced share, the consumer credits
are prevailing. Comparatively, in EU27 and euro zone, the situation is reversed where the
housing credits hold a share of over 70%. Such a difference shows the low purchasing power
of Romanian population and its prevailing orientation to consumption and the low degree of
endowment with consumer durable (National Bank of Romania, 2006). Consequently, the
banking crediting of Romanian population should align to European standards regarding the
relation between house credits and consumer credits. Among the studied countries, especially
the Czech Republic and the Baltic countries have a similar structure of the credits granted to
households as the ones in the Euro zone.
The extremely fast increase of credits given to population households and, within them,
mainly of the ones expressed in foreign currency (stimulated by the lower interest rates
compared to the ones related to loans in national currency and by the appreciation of national
currencies), has determined significant increase of the domestic demand, pressure on inflation
and increase, at high levels, even at alarming levels, of current account deficits, mainly in the
Baltics, Bulgaria and Romania (see the figures 5 and 6).
Table 10: Evolution of structure the loans granted to households
(according to destination) by the credit institutions in the period 2005 – 2008 (in %)
2005
2008
Country
Loans for Loans for Other Loans for Loans for other
housing consumer loans housing consumer loans
purchase credit
purchase credit
Bulgaria
28.41
60.63 10.96 42.81
51.16
6.03
Czech Republic
67.54
21.43 11.03 70.26
19.36
10.38
Estonia
82.16
8.88
9.00
80.51
11.10
8.39
Hungary
59.97
31.66
8.37
50.75
44.52
4.73
Latvia
71.46
14.75 13.79 78.95
12.38
8.67
Lithuania
69.07
16.26 14.67 69.28
14.47
16.25
Poland
35.76
37.64 26.60 52.53
19.61
27.86
Romania
13.19
84.55
2.26
21.06
74.29
4.65
Slovenia
31.95
45.96 22.09 43.38
36.85
19.78
Slovak Republic
65.66
13.67 20.67 67.60
13.54
18.86
MU 13
69.52
13.26 17.22 71.37
12.88
15.75
Source: national central banks and data processed based on ECB, 2008.
208
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Figure 5: Evolution of loan denominated in foreign currency (in per cent of total loans)
granted to households by the credit institutions in the period 2003–2008
100,00
90,00
80,00
70,00
60,00
50,00
40,00
30,00
20,00
10,00
0,00
2003
R
ep
ub
lic
S
lo
ve
ni
a
S
lo
va
k
R
om
an
ia
P
ol
an
d
Li
th
ua
ni
a
La
tv
ia
y
H
un
ga
r
E
st
on
ia
C
ze
ch
B
ul
ga
r
ia
R
ep
ub
lic
2008
Sources: IMF,2009(b) and National Bank of Hungary, 2009.
In this context, the monetary authorities, being concerned by providing price stability,
including provision of financial stability, adopted a set of measures in order to slow down the
credits given to the population, mainly the foreign currency credits and mortgage credits.
Within the measures adopted by the monetary authorities in various countries, mainly in
Bulgaria and Romania, there are included both handling of indirect tools of monetary policy
(especially, minimum banking reserve requirements, interest rate of monetary policy) and also
measure of management nature, such as introducing some crediting limits and limits to loans
expressed in foreign currencies.
Figure 6: Evolution of current account balance(in per cent of GBP)in the period 2003–2008
R
ep
ub
lic
S
lo
ve
ni
a
R
om
an
ia
P
ol
an
d
Li
th
ua
ni
a
La
tv
ia
E
st
on
ia
H
un
ga
ry
S
lo
va
k
-10,00
R
ep
ub
lic
-5,00
C
ze
ch
B
ul
ga
ri
a
0,00
2003
-15,00
2008
-20,00
-25,00
-30,00
Sources: IMF, 2009(b) and National Bank of Hungary, 2009.
The significant progresses recorded by the banking sectors of the countries under survey,
following privatization and entries of foreign banks, can also be highlighted also in the light of
209
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
the relation between credits and deposits (see the data of figure 7). Regarding the relation
credits/deposits, the progresses recorded by some countries point out the significant expansion
of the credit but also mutation at the balance level of credit institutions, such as their
significant orientation to the real economy, the increase of foreign financings as a consequence
of lower interest rates.
Figure 7: Evolution of the relation credits/deposits (in %), in the period 2005-2008
300,00
250,00
200,00
2005
2008
150,00
100,00
50,00
0,00
Bulgaria
Czech
Republic
Estonia
Hungary
Latvia
Lithuania
Poland
Romania
Slovenia
Slovak
Republic
Source: National Bank of Hungary, 2009.
The intensification of the banking crediting has implications also on the share of
nonperforming credits in the total portfolio of credits. Non-performing loans include substandard, doubtful and loss classification categories. Based on the data presented in figure 8, it
can be concluded that, in the year 2008, the highest share of nonperforming credits was
registered in Romania. This situation is due to the significant expansion of the credits granted
to households and especially of the credits in foreign currencies (see the data in tables 8 and 9
and figure 5) based on the significant appreciation of the Romanian currency in the first part of
2007 and on the renouncement of the National Bank of Romania to the measures of banking
prudency concerning the limitation of credits in foreign currencies. But, the significant
depreciation of the Romanian currency from the beginning of 2008 and especially from
October 2008, in the context of the current international financial crisis, has negative
implications for the debtors exposed to the currency risk and for the quality of the credits
portfolio of the credit institutions. In the present conditions, the share of nonperforming credits
is still high, being also determined by the fall of the population income and of the price of real
estate assets as a consequence of the international financial crisis.
In the year 2008, based on the significant depreciations of national currencies as an effect of
the turbulences from the international financial markets, it has been registered a meaningful
increase of the share of non-performing credits also in Latvia, Estonia, and Lithuania,
countries where the loans in foreign currencies granted by the credit institutions have held a
higher share (see the data from the figures 8 and 5).
210
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Figure 8: Evolution of the nonperforming bank loans
in 2005 and 2008 (in per cent of total loans)
12,00
10,00
8,00
6,00
2005
2008
4,00
2,00
0,00
Bulgaria
Czech
Estonia
Hungary
Latvia
Republic
Lithuania
Poland
Romania
Slovenia
Slovak
Republic
*BG-December; CZ-September; EE-September; HU-December; LV-December; LT-March;
PL-September; RO-June; SI-June; SK-September.
** includes only loans to the nonfinancial sector
Source: IMF, 2009(a).
As a result of the global financial crisis, the banks from Central, Eastern and South-Eastern
Europe face sharply slowing economic growth, tough external financing conditions, higher
risk aversion and a tense liquidity situation (Deutsche Bank Research, 2008). Due to the high
ratio of FX-denominated credits (e.g. in the Baltics, Ukraine, Hungary and Romania), the
strong FX depreciation represents an important challenge for the Central, Eastern and SouthEastern European banks. In 2008 and 2009 credit slow down sharply due to the local and
foreign funding constraints. The main sources of external bank funding (international bond
issuance, syndicated loans and parental intrabank funding) have declined in the last twelve
months.
In the context of the restructuring and privatization process, of the significant expansion of
crediting and competitiveness enhancement, the bank sectors of the Central and Eastern
European countries improved profitability and efficiency. Although interest margins decreased
as competition increased, banks witnessed a rise in income as the volume of operations
boomed and the range of bank products and services diversified. In the period 1994-2008, the
banks’s ROE increased from 2.8% to 21.2% in the three largest Central and Eastern European
countries (Poland, Hungary and Czech Republic). In 2008, the bank sectors of most countries
witnessed a deterioration of the profitability and efficiency ratios in the condition of the
considerable reduction of the volume of operations in this period of international crisis (see
table 11).
211
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Table 11: Comparative situation of profitability and efficiency
of the banking sector in the period 2005-2008 (%)
Country
2005
2006
2007
2008*
ROE ROA ROE ROA ROE ROA ROE ROA
Bulgaria
21.4 2.0 25.0 2.2 24.8 2.4
23.1 2.1
Czech
25.2 1.4 22.5 1.2 24.4 1.3
23.7 1.3
Republic
Estonia
21.0 2.0 19.8 1.7 30.0 2.6
21.4 2.0
Hungary
24.7 2.0 24.0 1.8 18.1 1.4
17.7 1.5
Latvia
27.1 2.1 25.6 2.1 24.2 2.0
4.6
0.3
Lithuania 13.8 1.1 21.4 1.5 27.3 2.0
16.1 1.2
Poland
20.6 1.6 22.5 1.7 22.4 1.7
22.2 1.7
Romania
15.2 1.9 11.7 1.5 11.4 1.3
18.11 1.4
Slovenia
13.8 1.0 15.1 1.3 16.3 1.4
13.7 1.1
Slovak
16.9 1.2 16.6 1.3 16.6 1.1
13.9 0.9
Republic
*BG-December; CZ-September; EE-September; HU-December; LV-December; LTDecember; PL-September; RO-December; SI-September; SK-September.
Source: IMF, 2009(a) and National Bank of Romania, 2008(a).
From the viewpoint of financial stability, an important part is played by the ratio “capital
adequacy”, that although in certain countries had a descending trend is still in all countries
above the minimal level provided by European and international regulations (8%).
Table 12: Comparative bank regulatory capital
to risk-weighted assets in the period 2005-2008 (%)
Country
2005 2006 2007 2008*
Bulgaria
15.3 14.5 13.9
14.9
Czech Republic
11.9 11.5 11.5
12.9
Estonia
11.7 13.2 14.8
18.3
Hungary
11.6 11.0 10.4
11.1
Latvia
10.1 10.2 11.1
11.8
Lithuania
10.3 10.7 10.9
12.9
Poland
14.5 13.2 12.1
11.6
Romania
21.1 18.1 12.7
11.9
Slovenia
10.6 11.1 11.2
11.2
Slovak Republic 14.8 13.0 12.4
11.3
*BG-December; CZ-September; EE-September HU-December; LV-December; LTDecember; PL-September; RO-September and June; SI-June; SK-September.
Source: IMF, 2009(a).
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4. Conclusions
The bank sectors of Central, Eastern and South-Eastern European countries passed through
significant qualitative transformations in the past decade, being dominated by private banks,
respectively by foreign banks, which brought numerous advantages for internal bank markets
and new challenges for the monetary authorities.
A significant index for the progresses made by the bank sectors of Central, Eastern and SouthEastern European countries is the increase of the financial mediation degree that shows the
significant orientation of the credit institutions to the real economy.
The accelerated dynamics of loans granted by the credit institutions, especially households
loans, particularly in the Baltic countries, Romania and Bulgaria has been driven by changes
in the supply and demand of credits, which have improved significantly in the last years.
These changes are due to improved macroeconomic conditions (lowering the inflation rate and
interest rates, accelerating economic growth), intensifying competition in national banking
markets, improvement schemes to guarantee loans, improving banking legislation, accounting
practices and auditing, initial low debt level and growth of population’ revenues.
The accelerated growth of households loan has been significantly sustained by the housing
loans, which in some countries was the most important product on the retail banking segment.
Such development has both positive effects through increasing the level of living of the
population, significant development of the real estate sector, but it implied risks to
macroeconomic stability.
In the context of current international financial crisis, lending activities of credit institutions
recorded a significant decrease in the beginning of 2009.
The banking sector from the countries analyzed in the paper was not directly affected by the
current crisis as it has been exposed to toxic assets. Starting with October 2008, the effects of
international crisis were felt indirectly by the banking sector from the countries considered for
the study by reducing external financing, increasing their cost and damage the international
economic environment, which decreased the supply of and demand for loans, respectively the
restriction in the activity of bank loans.
In some countries, the banking sector is faced with deteriorating loan portfolio quality, lower
performance indicators and instability.
The economic recession and the worsening of macroeconomic imbalances all over the world
have intensified the concerns of national and international authorities in order to adopt urgent
measures, aimed at restoring macroeconomic stability and resuming the credit activity.
In the period before the current crisis amplification (amplification produced by Lehman
Brothers bankruptcy in September 2008 and after the taking over, in the same month, of the
bank Merrill Lynch by Bank of America), the central banks of the countries reviewed have
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
implemented restrictive monetary policy measures (in particular, higher reserve requirements,
higher interest rate, the introduction of limits on loans denominated in foreign currency) in
order to counter inflationary pressures caused by rapid dynamics of bank loans, especially
those granted to the households.
Starting with September 2008, when turmoil in international financial markets have turned
into a deep financial crisis worldwide, the central banks in the countries reviewed have relaxed
restrictions on monetary policy (in particular, by reducing reserve requirements and in early
2009, by lowering the interest rates of monetary policy) to ensure normal operation of the
banking sector and to support the bank lending of real economy.
In elaborating the measures to implement, the national authorities took into account the
particularities of national financial systems (bank-oriented systems), and the extremely serious
effects of restricting lending on national economies.
Currently, the bank lending activity is facing a slight recovery, but we can say that its reviving
depends on the real economy, because the economic agents are the main customers of banks.
References
Burcu, A. (2008). “Banking Structure and credit growth in Central and Eastern European
Countries”, IMF Working Paper 215, http://www.imf.orgexternalpubsftwp2008wp08215.pdf
Hryckiewicz A. and Kowalewski, O. (2008). “The Economic Determinants and Engagement
Modes of foreign banks in Central Europe”, Working Paper 50, National Bank of Poland,
http://www.nbp.pl/Homen.aspx?f=en/publikacje/materialy_i_studia/2008_en.html
Isărescu, M.C. (2008). “Probleme ale politicii monetare într-o ţară emergentă. Cazul
României”, http://www.bnr.ro/PublicationDocuments.aspx?icid=6885
Isărescu, M.C. (2009). “International financial crisis and challenges for monetary policy”,
http://www.bnr.ro/PublicationDocuments.aspx?icid=6885
Sirtaine, S. and I. Skamnelos (2007). “Credit Growth in Emerging Europe. A Cause for
Stability Concerns?”, Policy Research Working Paper 4281,
http://ideas.repec.org/p/wbk/wbrwps/4281.html.
Walko Zoltan (2008). “Housing Loan Developments in the Central and Eastern European EU
Member States” in “Focus on European Economic Integration”,no:2,
http://www.oenb.atenpresse_pubperiod_pubvolkswirtschaftintegrationfocus_on_european_eco
nomic_integration.jsp
Bank of Lithuania, Financial Stability Report, 2005-2009,
http://www.lb.ltengpublicationsindex.html
214
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Bank of Slovenia, (2008), Financial Stability Review.
Bank of Slovenia, (2007), Financial Stability Review.
Bank of Slovakia, (2009), Analysis of the Slovak financial sector for the year 2008
Centre for Eastern Studies (2009). „Support for banks from Central and eastern Europe”,
http://osw.waw.pl/files/CEWEEKLY_21.pdf.
Czech National Bank (2008). “Financial Stability Report”,
http://www.cnb.cz/en/financial_stability/fs_reports/.
Deutsche Bank Research (2008). “Eastern Europe: Tough times ahead“ in „Credit Monitor
East Europe”,
http://www.dbresearch.com/servlet/reweb2.ReWEB?rwdspl=0&rwnode=DBR_INTERNET_E
N-PROD$RSNN0000000000022921&rwsite=DBR_INTERNET_EN-PROD
EBRD (2008). Transition report- „Growth in transition”,
http://www.ebrd.com/pubs/econo/series/tr.htm
EBRD (2006). “Finance in transition”, Transition report,
http://www.ebrd.com/pubs/econo/series/tr.htm
ECB (2008). “EU Banking Structures”, http://www.ecb.int/pub/pub/prud/html/index.en.html
ECB (2006). Macroeconomic and financial stability challenges for acceding and candidate
countries“ in “Occasional Papers Series”,no: 48,
ttpwww.ecb.europa.eupubpdfscpopsecbocp48.pdf
IMF (2009a), “Global Financial Stability Report”, http://www.imf.org/external/index.htm
IMF (2009b), Regional Economic Outlook – Europe Addressing the crisis.
National Bank of Hungary (April 2009). “Report on Financial Stability”,
http://english.mnb.hu/engine.aspx?page=mnben_stability
National Bank of Poland (2006). “Financial System Development in Poland”
http://www.nbp.pl/homen.aspx?f=en/SystemFinansowy/rozwoj.html.
National Bank of Romania (2006). “Report on Financial Stability”,
http://www.bnr.ro/Publicatii-periodice-204.aspx
National Bank of Romania (2008 a), “Monthly Bulletin no: 12”, http://www.bnr.ro/Statistics
National Bank of Romania (2008 b). “Annual Reports”,
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
http://www.bnr.ro/Publicatii-periodice-204.aspx
National Bank of Romania, (2008c). “Financial Stability Report”,
http://www.bnr.ro/Publicatii-periodice-204.aspx
National Bank of Romania (2009). “Financial Stability Report”, http://www.bnr.ro/Publicatiiperiodice-204.aspx
National Bank of Slovakia (2007). “Financial Stability Report”,
http://www.nbs.sk/en/publications-issued-by-the-nbs/nbs-publications/fiancial-stability-report.
Raiffeisen Research (2009). “CEE Banking Sector Report”, http:// www.rzb.at/eBusiness
www.bnb.bg
www.bank.lv
www.bankofestonia.info
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Afşin Şahin
B. Barış Alkan*
Department of Statistics
Sinop University, Turkey
[email protected]
Yılmaz Akdi
Department of Statistics
Ankara University, Turkey
Cemal Atakan
Department of Statistics
Ankara University, Turkey
BIPLOT REPRESENTATION OF THE FINANCIAL INVESTMENT RETURNS
Abstract
The aim of this study is to represent the rates of real profits created by means of financial
investments in Turkey from January, 2001 to October, 2008 using the biplot approach. We
investigate a cluster of euro&dollar&gold returns. Deposit interest rate return did not have an
important correlation with the other rates of returns. There was a negative correlation between
euro&dollar&gold and stock returns. During the crisis and turbulence periods,
euro&dollar&gold returns cluster increased, however stock return decreased. We also
observed that economic stability passed-through financial stability.
Keywords: Financial macroeconomics, Financial Returns, Biplot Approach.
Acknowledgement: This paper was originally published in the AB Review, Vol. 10 No.2,
2009, pp. 76-86. The authors of this article were granted a written permission from AB
Review- which is a biannual academic journal of the Arab Bank Plc- to republish the article in
the “Proceedings of the First International Conference on Critical Issues in Business and
Economics”, 5-6 November 2009, Gumushane, Turkey.
* Corresponding author
1. Introduction
Financial macroeconomics is a discipline which helps us to understand the behavior of tools
for speculative money demand, however more complicated then the sciences because of
unobservable events, asymmetric information and uncertainties. There is a high level of
asymmetric information in economics specifically concerning the equity markets which puts a
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
spanner into the research papers. The movements caused by hidden information in big-openmarkets affect the small-open-markets (see Hartmann, Straetmans and De Vries, 2004 and
Dungey and Martin, 2007 for the contagion and linkages among different markets). Therefore,
this asymmetric information pass-through the small-open-economies simultaneously. It is a
common fact in small-open-economies that the international stock market directly affects the
internal stock market. Again the role of asymmetric information can not be underrated.
Knowing the future may help investors to earn more. See Bauer and Vega (2008) and
literature cited in for the effects of several variables on the international stock market
covariation, specifically the effects of superior knowledge about the interest rates and
aggregate equity market. Or in a simultaneous recession case, the correlation among the
international stock market increases as mentioned by Aydemir (2008).
The aim of this article is to represent and analyze the real rates of returns of US dollar, euro,
stock, gold and deposit interest rate in a two dimensioned space by biplot approach in a single
graph by the location of the observations which may help for practioners in economic
institutions while taking investment decisions. Granger et al. (2000), Kolari et. al. (2008),
Carruth et al. (2000) and Hammoudeh and Yuan (2008) are the recent studies trying to
investigate the interaction among the financial variables by convensional time series methods.
We simply represent the interactions among several investment tools by biplot. The approach
also captures the asymmetric information during the turbulences and the effects of cumulative
shocks on the series. Within this asymmetric context as far as we know, this is the sole paper
other then Gheva (1986), applying a dynamic biplot representation of a time series data. We
only apply the methodology for a rate of returns of the financial tools. We do not predict the
variables or search for a possible causality among the variables. Here we simply present a
representation of several investment tools in two dimensions. However, the standard error and
correlation among the variables can be catched by an application of vector calculus. We
observed that the total variation was expressed sufficiently and the knowledge loss is minimal.
The following section is the data and methodology. In the third part, we present possible
relations between the real returns of deposit rate, equity share, gold and exchange rate. The
fourth section discusses the results obtained from the approach and gives a brief summary of
the findings.
2. Data Description and Methodology
In this study, we focused on the financial investment returns of Turkey because she is one of
the candidate countries for the European Union membership and is the fifteenth biggest
economy around the world (as of 2008, by 922 billion dollars of GDP). Turkey is classified
under new emerging markets and has a small-open-economy, therefore affected from
international financial transactions. The rates of real profits by means of financial investment
data collected and constituted from the monthly press releases of the Turkish Statistical
Institute from January, 2001 to October, 2008. Month to month base (%) change of real (CPI
based) profit deposit interest (D), stock exchange (S), US dollar (U), euro (E) and gold (G).
We believe in that investors look at real values while taking decisions. So we used real values
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
of profits. The reason for using CPI for relative values is that Central Bank of the Republic of
Turkey (CBRT) implements inflation targeting regime on it.
In this study we use the graphical approach known as biplot to examine the relation between
several economic variables described above. The biplot technique used for showing significant
properties of multivariate data structure initially introduced by Gabriel (1971) and later
developed by Bradu and Gabriel (1978), Gabriel and Zamir (1979), Gower and Harding
(1988), Gower and Hand (1996). The biplot can be considered as multivariate version of dot
scatter plots which have been used for analyzing bivariate data. This technique is based on the
singular value decomposition analysis. The following subsection briefly summarizes the
theoretical background for the biplot approach.
Singular Value Decomposition
A matrix is singular if its determinant is zero or not invertible. Singular value decomposition
(SVD) is a generalization of the eigenvalue decomposition. This technique is used for
decomposition of non-invertible and rectangular matrix. When we apply SVD to a matrix, we
obtain three simple matrices. Two of them are orthogonal and the third is diagonal matrices.
Singular value decomposition of a data matrix X which has a rank (( Rank ( X nxp ) ≤ min{n, p})
and X ∈ℜnxp ) is shown by equation (1) (Johnson and Wichern,1998):
T
X nxp = U nxr Γ rxrVrxp
(1)
U nxr and V pxr are called as left and right singular vectors respectively. These vectors satisfy
orthogonality condition, i.e. U T U = I r and V T V = I r . The symbol I r denotes here the unitity
matrix of size r. The diagonal matrix Γ is given bellow:
Γ = diag(γ 1 , γ 2 ,..., γ r ) , γ 1 ≥ γ 2 ≥ ... ≥ γ r > 0 .
The square root of the eigenvalues ( λi , i = 1, 2,.., r ) of the XX T or X T X matrices give
singular values. The normalized eigenvectors of XX T are called the “left” singular vectors
(U ) while the normalized eigenvectors of X T X are called the “right” singular vectors (V ) .
Singular value decomposition of a data matrix X is written by (2):
r
T
X nxp = U nxr ΓrxrVrxp
= ∑ γ i u i viT = γ 1u1v1T + γ 2 u 2 v2T + ... + γ r u r v rT .
i =1
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(2)
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Eckart-Young Theorem
Singular value decomposition of a data matrix X is shown by equation (1). Singular value
(k )
where ( k ≤ r ) is given by (3):
decomposition of X nxp
(k )
T
.
X nxp
= U nxk Γ kxkVkxp
(3)
(k )
to X nxp by least square approach
Eckart-Young theorem finds optimal approximation of X nxp
theorem. Namely, the aim is to minimize the sum of squared of errors. According to this, we
may obtain the following (Eckart and Young, 1936):
min
r
∑ γ i2 =
X − B = X − X (k ) =
rank ( B ) = k
i = k +1
r
∑λ
i = k +1
i
.
(4)
An Approximation to the X Matrix with Lower Ranked Matrices
(k )
Assume that, we want to approximate to the matrix of X nxp of rank r by a matrix X nxp
of
lower rank ( k ≤ r ). For to do this, we initially define the approximation error concept. The
measure of approximation error is generally given by E = X − X ( k ) as Euclid norm of error
matrix. We can write squared Euclid norm matrix as a trace of internal product of matrix,
therefore we can write the following equation (Bartkowiak and Szustalewicz, 1995).
1/ 2
E = X −X
(k )
= [trace( E E )]
T
1/ 2
⎛ n p ⎞
= ⎜ ∑∑ eij2 ⎟
⎝ i =1 j =1 ⎠
.
(5)
The problem is how to approach to the matrix X nxp with lower rank matrices with minimum
error. This problem is initially considered by Householder and Young in 1938. According to
(k )
this, the best approximation of a matrix X nxp of rank r by a matrix X nxp
of rank k ≤ r , when
minimizing the Euclid norm of error matrix E = X − X ( k ) , is obtained by taking as the
approximation matrix the first k component of the singular value decomposition of X
(k )
(Bartkowiak and Szustalewicz, 1995). The singular value decomposition of X nxp
approach
matrix is given by the equation (3). While detecting the error of approximation, if k=r in
equation (5), the error is zero.
(k )
matrix to squared norm of
Goodness-of-fit is defined by the ratio of squared norm of X nxp
X nxp matrix.
Goodness-of-Fit =
X (k )
X
2
2
=
λ1 + ... + λk
, k ≤r.
λ1 + ... + λr
(6)
All of the eigenvalues is equal to the variance of the data cloud given by X matrix:
Total variance = X
2
= trace( X T X ) = λ1 + ... + λr .
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Biplot Approach
Biplot is a technique showing the rows and columns of the matrix X nxp on a single graph.
Nearly in all the applications, concerning the structure of the data, a transformation has been
done to the X matrix and biplot approach has been used. As an example to the transformation,
centralization according to the mean of the variable, standardization of the variables and
logarithmic transformations. Assume that the rank of the matrix Z nxp after the transformation
is r. Decomposition of the Z nxp is given by the equation (8) after the transformation (Aitchison
and Greenacre, 2002):
T
(8)
Z nxp = Fnxr Grxp
Singular value decomposition is used for decomposition of this matrix. If singular values are
turn overed to the Z matrix’s right single vectors, we can write the following equations:
Fnxr = U and G pxr = V Γ
(9)
On r dimension, the column of the GT matrix and the row of the F matrix give coordinates of
the n points for rows and p points for columns respectively. The biplot graphic is obtainable
with this way.
Biplot is defined by the least-squares approximation of the covariance matrix S = Z T Z (n − 1)
by GGT (n − 1) , the matrix inner products between the row vectors of G n − 1 . Thus, the
lengths of the vectors will approximate the standard deviations of corresponding variables.
The cosines of the angles between vectors will give the correlations among the variables
(Aitchison and Greenacre, 2002).
3. Empirical Evidence
As Gheva (1986) indicates, in order to apply Biplot to the corresponding series, we first
checked whether there is any trend in the series or not. Table 1 reports the conventional unit
root tests as Augmented-Dickey Fuller (ADF) and Phillips-Peron (PP) for the series of
interest. Panel A reports the series with an intercept term, Panel B gives the intercept term and
the time trend and Panel C reports the tests on the first difference of the series for the
Augmented Dickey-Fuller and Phillips-Peron Unit Root tests. Table 1 suggests that we can
reject the null hypothesis of a unit root at 5% of significance level so we claim that series are
I(0). This suggests that the series do not include a trend so that we can apply biplot techniques
for the corresponding series.
The rows (observations) of a data matrix are represented by points while the columns
(variables) appear as vectors emanating from the origin in Figure 1. According to Gheva
(1986), a dense of pencil of vectors corresponds to a set of positivity correlated variables,
whereas when the angles among the vectors are obtuse, the correlation is negative.
Perpendicular vectors specify that there is no correlation among the variables. The length of
vectors and the angle between vectors summarize the ordering the standard deviation and
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
correlations for the period we are concerned. Therefore we provide opportunity for
representing the dynamic behavior of the multivariate data.
It is assumed that 80% of the total variation explained by two dimensional biplot is in the
acceptable percentage (Johnson and Wichern,1998). When the three dimensional graph is
used, nearly 88% of the variance is explained. We prefer to present two dimensional graph
because it gives a visual advantage. Figure 1 and Table 2 present the results of biplots. First
we represent the correlation relations of the assets by using angles between the semi-lines
starting from the origin. Second we determine leading outliers which corresponds to the
duration of two crises and one turbulence (multivariate outlier test results also detected these
dates).
Semi-lines represent the returns for the assets. The angle corresponds to the degree of
correlation. Euro&dollar&gold cluster exhibits high correlation (near comonotonic). The
correlation between deposit interest rate&stock returns is near zero. Dollar&euro&gold cluster
with deposit interest rate are around zero (on the negative side). The pairwise correlations with
corresponding angles ( θ ) are reported in Table 2. The angle between dollar&gold is bigger
than dollar&euro. There is a high negative correlation between euro&dollar&gold with stock
returns. For the dates scattered around the origin, we observe a similar structure of investment
returns. Central Bank implements inflation targeting regime in most of those time period and
inflation starts to diminish. During the transition period to low inflation, the observations
scatter around the mean, therefore we may claim that the stability of the financial market
increases during those months.
The dots in the Figure 1 correspond to the times. We noticed that February-2001 crisis, May2006 turbulence and October-2008 crisis occurred in this time span. During the economic
crisis and turbulence periods, we observe that dollar, euro and gold increase. After the second
month of 2001, Central Bank let the exchange rate be float, therefore Turkish Lira (TL)
depreciated. This crisis was a consequent of internal economic imbalances. There was a credit
crisis and some of the banks were undertaken by the government. Euro&dollar&gold also
increases during the turbulence time as May, 2006 where the inflation rate has started to
increase, internal political problems emerged added as a risk premium and CBRT decided to
increase interest rates. The management of internal uncertainties was not successful enough to
suppress the external contagion effects. The latter big economic crisis in October, 2008 was in
reaction to outside economic developments. However, both crises were because of the moral
hazard problem and greeds. When the deposit interest rate is very low, the stock returns
decrease, however dollar&euro&gold returns increase as seen in February-2001, October2008 crisis and May-2006 turbulence.
CBRT has started to adopt floating exchange rate regime in February, 29, 2001 and announced
implicit inflation regime in January, 2, 2002. Therefore it is meaningful to catch the
correlations by a lower rank. The points scattered around the origin show dates where the
economic stability passed through the financial stability.
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According to the scatterplot results in Figure 2, it is observed that the results of the scatter
plots and biplots give a similar correlation structures among the variables. According to the
scatterplot results, deposit interest rate has a correlation of near zero by
gold&euro&dollar&stock. Between stock and gold&euro&dollar there is a negative
correlation. High positive bivariate correlations are observed between gold&euro&dollar. This
case also strengthens the results of biplot approach.
4. Discussion and Conclusion
Economic activity and rates of return of financial investment tools are keenly related.
Behavior and attitude of investments have been primary affected from general structure of the
economy, stability, political credibility and the harmonization ability of the financial system to
the prudent man rule. At the same time, financial instruments are powerful predictor of
economic activity and has a role of economic pulse.
The rate of real profits of financial investment is an impulsive force attracting investors for
choosing the type of instrument to get maximum return. If the returns of deposit rates do not
satisfy the risk appetite of the investors, they look through the tools of exchange rates, gold or
stock. The most guaranteed tool is deposit rate so risk averse investors will choose to invest
their money to deposit banks when they observe the others as major categories of risky assets.
Besides when the return rate of deposits is low or not guaranteed by regulations; model of
resourceful, evaluating, maximizing man will turn its way to other bundles more with a higher
probability.
The foreign currency movements are very critical for understanding the market dynamics of a
small-open-economy. The reserve monies as US dollar enter to a small market, appreciates
domestic money. The inverse is also possible. The asymmetric information may let TL be
depreciated because of capital outflows. Just before the capital outflow, we observe that the
equity market goes down. CBRT increases interest rates to increase capital inflow again. At
this stage effectiveness of the interest rate policy appears. The asymmetric information may
have bigger effect then the interest rate announcements. If capital comes in, TL appreciates
again and the sovereignty problem of the Treasury solved. When the local currency
devaluates, price of stocks decrease and the gold returns increase. During the periods of
economic instability, returns on stock returns decrease, however interest rate, foreign currency
and gold increase. So there are huge and complicated interactions among economic variables.
Supporting our findings, the interaction among stock returns and foreign exchange rates are
investigated by conventional time series analysis by several authors. Istanbul Stock Exchange
is subject to the influence of both traditional and portfolio approach in the sense of Granger,
Huang and Yang (2000). However the portfolio approach is dominated the latter causing an
inverse relation between stock prices and exchange rates. Kolari et al. (2008) also examines
the cross-section of stock returns and foreign exchange rates. They find that stocks most
sensitive to foreign exchange risk have lower returns than others and the foreign exchange risk
is priced in the stock returns and is not positive.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Our solutions indicate that when economy booms and value of the firms increase, the price of
gold diminishes. That is consistent with the general view that gold has an inelastic supply
curve and mostly regarded as a low-risk hedge. The price movements of gold price reflect
demand-driven substitution for other assets which reflects indirect uncertainty on investment
returns and sentiment (Carruth, Dickerson and Harley, 2000). According to Hammoudeh and
Yuan (2008) gold can be a good tool of investment in anticipation of economic problems.
Rises in gold price increases expectations of inflation which pass through interest rates also
affect gold returns. They claim that the gold is not sensitive to bad news, therefore it is a good
investment specially in the short run in anticipation of bad times such as economic turbulences
and crises. Moreover rising interest rates have a diminishing effect on the gold market;
economic policy makers can use tight monetary policy to decrease volatilities.
For the safe asset, deposit interest rate, Central Bank of the Republic of Turkey is an active
player changing interbank rate which mostly affects the way of the deposit bank interest rates.
If the deposit interest rate increases, the stock and exchange rate returns should be diminish
and price of gold be decreased. The stock returns have a conventionally indirect relation with
the foreign exchange rate and interest rate. A diminish in the interest rate should increase
investment and the growth, and the value of the stock companies should increase which lets
nominal values of the stocks increase. If the price of foreign currency increases, interest rate
goes up and in the short run the demand for stocks decrease. Therefore the prices of the stocks
diminish. The rate of return of stock market depends on the deposit interest rate. The gold
prices dependent on the supply and demand conditions, however during the crisis period, the
price of gold increases. We observe that the price of gold diminish during the stabilized
economic conditions.
In such an environment, where there is asymmetric information and deficiencies in
regulations, the risk for financial tools increases. The financial reforms are essential at this
stage. We observed that during the years when the government made good financial reform
the financial markets also stabilize. According to Torre (2007) the reforms such as stock
market liberization, enforcement of insider trading lows, introduction of electronic trading
systems, privatization programs, structural pension reform and institutional reform, helped
stock markets to be developed. Following major central banks, Central Bank of the Republic
of Turkey also funded the markets by the weekly repo to increase liquidity, decreased the
lending interest rates on October, 22, 2008, and opened foreign exchange depo market on
October, 9, 2008 with more limits to adjust the liquidity opportunities in the presence of
October, 2008 crisis (see CBRT, 2008: box 2 for the comparison of precautions taken by the
governments of twenty countries including Turkey during and after the October, 2008 crisis.).
In our sample the observations are only random changes over time. Therefore there is no time
trend in the data. The stationarity of the data increased the robustness of the results. We
observed that the return rates of financial investments are interconnected. The systematic risk
or residual risk is not diversifiable. The biplot helped us to represent the correlations among
the observations and variables in a single two dimensioned graph.
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TABLE 1 Unit Root Tests
A: Intercept
ADF
PP
D
S
U
E
G
-5.6103
-7.7519
-6.8802
-7.5782
-7.3108
-5.3444
-7.7085
-5.7182
-5.9810
-6.6508
B: Intercept with Trend
ADF
PP
-5.8043
-7.7104
-6.7729
-7.6222
-7.2557
226
-5.3969
-7.6656
-5.6723
-5.9633
-6.6171
C: None
ADF
PP
-4.1859
-7.7633
-6.8460
-7.6208
-7.1038
-4.0008
-7.7192
-5.7781
-6.0136
-6.5056
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
FIGURE 1 Biplot Graph
TABLE 2 Correlation Values
Variables
E-U
E-G
U-G
D-S
D-U
D-E
D-G
S-E
S-U
S-G
Correlation
0.9979
0.9845
0.9937
0.0065
-0.0999
-0.0358
-0.2104
-0.9996
-0.9956
-0.9790
227
Angle ( θ )
3.7138
10.1000
6.4348
89.6275
95.7334
92.0516
102.1458
178.3793
174.6232
168.2372
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
G
E
U
S
D
FIGURE 2 Scatterplots of the Variables
D
S
U
228
E
G
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Adebola B. EKANOLA
Department of Philosophy
University of Ibadan, Nigeria
[email protected]
RECONCILING PROFIT AND SOCIAL DEVELOPMENT IN
OSIGWE ANYIAM-OSIGWE’S BUSINESS ETHICS
Abstract
The idea of corporate social responsibility (CSR) emerged to reconcile the apparent tension
between the primary objective of business corporations, which is profit maximization and the
essential goal of the economic system, of which corporations is a component, which includes
sustainable economic growth and sustainable social development, interpreted as the
enhancement of the wellbeing of members of society. This paper examines how the tension
described above can be reconciled from the perspective of an African sage philosopher,
Osigwe Anyiam-Osigwe. The paper argues in line with Anyiam-Osigwe’s cosmopolitan ideal
that business corporations, as a key player in the economic sector, should transcend the
“subjective or personal” and “limited vision and perception” of profit maximization as their
ultimate objective and mediate their activities with an adequate consideration for the growth of
the economic sector and sustainable social development.
Key words: Osigwe Anyiam-Osigwe; Profit; Social development
Profit maximization and increase in shareholders
wealth should not be our only goal. We should
remain acutely aware of the problems of poverty,
ignorance, neglect and corruption that characterize
our sub-region of the world.
We are committed to the upliftment and welfare of
the average individual not only in per capita terms
but also in terms of spiritual and moral values.
Applying the principle of the ‘group mind’ we strive
to make Inter-dependence, Integrity, Fidelity and
Industry successful.
(The Corporate Philosophy of Anyiam-Osigwe Group)
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1. What is Business?
The word business is quite ambiguous. In its ordinary and most general usage, the term
connotes what an individual or entity is concerned with or interested in. It implies a state of
being busy carrying out an activity. However, it is often employed within the realm of
economic discourse to denote either any activity that involves the provision of goods or
services to consumers with the ultimate goal of earning a livelihood or profit. Alternatively,
the term, business, might refer to an organization which engages in such activities.
In the contemporary global economic order, which is predominantly capitalist in orientation,
business is mostly privately owned and formed, primarily, to earn profit that will increase the
wealth of its owners and grow the business itself. Thus, the major objective of the owners and
operators of business is the receipt or generation of a financial return, called profit, in
exchange for work and acceptance of risk. This is what distinguishes business, properly called
from such organizations as cooperative enterprises and state-owned enterprises that have
alternative or additional goals aside from maximizing or turning a profit.
2. Transnational Corporations
Today, there are different forms of business organizations, but the one that is most prominent
is the transnational business corporations (TNCs). They are defined basically in terms of the
fact that their operations transcend national boundaries to cover several nations. This form of
business organizations emerged as a result of internal developments in the capitalist economic
order. An important aspect of this is described by Marx as the process of “the concentration
and centralization of the capital” (Heilbroner, 1980, p.124). It is the process by which giant
companies become the typical operational units of mature capitalism, as successful businesses
generate additional capital from their sales and also acquire the assets of weaker competitors
during periods of crisis. As businesses compete for the factors of production and also markets
for their finished goods and services, they struggle to expand their activities beyond national
boundaries, with this resulting in the internationalization of capital (Heilbroner, 1980, pp.132133). The existence of transnational corporations confirms Karl Marx’s prediction that
capitalist business entities would eventually take up a transnational structure as they
competitively seek for new sources of the means of production and new markets for their
products.
3. The State and the Global Capitalist Economic Order
Traditionally, the state was construed as sovereign, having complete control over the entire
internal affairs in its area of jurisdiction. This includes the political, economic, legal and every
other sphere of social existence. The state was meant to facilitate sustainable social
development in its territory, with this now understood, in the final analysis, as a complex of
increase in GNP per capita, the level of life expectancy, access to education, health care,
housing, sanitation, drinking water and food (UNDP 1997, pp.142-143).
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However, with the global expansion of capitalism through the activities of transnational
corporations, the global economic order began to take its present shape of a well knitted
integration of virtually all the national economies of the world (De Rivero, 2001, pp.25-26).
Indeed, “today, the greater part of the goods, services, financial transactions, entertainment
and publications is produced by transnational enterprises” (De Rivero 2001, pp.25-26). States
no longer have a sovereign control over national economies as the activities and decisions of
transnational corporations taken outside national territories define not only the economic
condition but also the general social condition prevalent in virtually all nations. In the words
of Rivero,
Through the actions of these powerful enterprises,
states have been losing sovereign control over
economic and cultural decision making…. the world
scope of the economy (that) allows decisions taken
outside the national territory to determine the behaviour
of interest rates, the fiscal deficit, the currency value,
the price of primary products, the amount of unemployment,
or the relocation of entire industries. Activities that
were formerly reserved as strategic have practically
disappeared. They may be taken over by companies
that are located abroad, and even in states that were
traditionally considered rivals. (2001, pp.26-27)
Through the process of globalisation and the operation of the free-market principles, which
require states to withdraw from core economic activities through the processes of
deregulation, privatization and commercialization, states have greatly lost control of their
national economies. A key aspect of this process that has weakened the influence of the state
in economic and developmental matters is the globalisation of the financial world. With this,
“the destiny of many national economies and culture is being determined not in government
offices or parliaments, but in the international financial markets of New York, Chicago,
London, Singapore, Hong Kong, Tokyo, Frankfurt or Paris, and in the boardrooms of the
transnational corporations” (De Rivero, 2001, pp.46).
4. The Current Global Economic Crisis and the Jettisoning of the Principle of the Free
Market
As is evident in the present global economic crisis, events that occur in a specific national
economy consequent of the decisions or actions of transnational corporations have ripple
effects, sending shock waves through all the national economies of the world, with the state
left largely helpless. The case of the collapse of Lehman Brothers on 15 September 2009 in
the U.S.A is a very good example. It can be rightly described as the gong that marked the
effective commencement of the current global economic crisis. With the bankruptcy of this
financial institution came a financial panic that threatened to shatter the global economic
order. This was, in turn, followed by an unprecedentedly expensive effort by governments on
both sides of the Atlantic to stabilize their national economies and also the global economy.
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It must be noted that efforts by many of the governments of the nations of the world to
mediate the global economic crisis involve the jettisoning of the capitalist core principle of the
unfettered market. For instance, President Bush in December, 2008, paradoxically affirmed,
“I've abandoned free-market principles to save the free-market system" as trillions of taxpayer
dollars was approved by different governments in different parts of the world as handouts,
loans and guarantees to save the world’s largest financial institutions and major corporations from
collapsing. This is indicative of the fact that at least some of the principles guiding the
operations of businesses within the capitalist system are flawed, especially if we are to take
into consideration the wellbeing of the national or global economy of which business entities
constitute an important component.
5. The Idea of CSR
The issue of social responsibility within the context of business relates to the obligation of
business entities and corporate officials to carry out their operations in ways that would
maximize their positive impacts and minimize their negative impacts in society (Ferrell,
Fraedrich and Ferrell 2000, p.71). This might be looked at from four perspectives that overlap
in some key ways: legal, ethical, economic and philanthropic. The legal dimension of the
social responsibility of business entities and their officials consists in their obedience to all the
relevant laws and regulations duly established by government to set a minimum standard for
responsible behaviour. Indeed, no serious contention can arise over whether or not businesses
should conform to legal demands that have been duly formulated. The prevalent expectation is
that business organisations have a responsibility to abide by the demands of the law.
The ethical dimension of social responsibility is informed by the social standards, the norms or
expectations reflecting the prevalent concern of major stakeholders in business. These
stakeholders include all that are affected, directly or otherwise, by business activities:
consumers, employees, suppliers, shareholders and community. Usually, the ethical dimension
of the social responsibility of business relates to questions about what moral responsibilities
business entities have and also what is morally fair or just in the relationship between business
and stakeholders.
The economic aspect of the social responsibility of business, traditionally speaking, is
concerned more directly with how resources for production are managed in order to maximize
the owners’ or shareholders’ value or wealth. It is in this regard that it is stressed that the only
social responsibility that business has is to make profit. The philanthropic perspective is about
the extent to which businesses should contribute to the welfare of society. This is often
discussed, for example, in terms of charitable donations and contributions towards such
ventures as the improvement of healthcare service delivery and education.
Practically speaking, however, these dimensions of the social responsibility of business cannot
be distinguished in a rigid manner. In the final analysis, they are all about how the decisions
and activities of business entities affect social wellbeing, the extent to which and how
businesses should pursue social wellbeing. It is in this regard that the issue of the social
responsibility of business is marked by a general controversy between those who affirm and
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
those who deny that business has a social responsibility beyond the economic responsibility of
managing the resources of production in ways that profit would be maximized for the owners
of business. Commenting on this debate, Milton Friedman rightly observes that there is an
increasing acceptance that business and its officials have social responsibilities beyond the
profit making interest of the owners of business (1988, p.349). He, however, contends that
this opinion betrays a fundamental misconception of the
character and nature of a free economy. In such an
economy, there is one and only one social responsibility
of business-to use its resources and engage in activities
designed to increase its profits so long as it stays within
the rules of the game, which is to say, engages in open
and free competition, without fraud or deception.
This line of argument is quite prominent among business owners, who maintain that issues of
social development are the legitimate concern of government. Indeed, various arguments have
been presented in an attempt to establish that much of the social concerns that are raised in the
discourse on the social responsibility of business should be and are best left for governments
to handle (Freidman 1998, pp.246-251; Smith 1998, pp.252-257). The irony of this position,
however, is that as business entities, especially the TNCs, enjoy increasing global powers and
influence, and as the socio-economic powers of government is being eroded within the global
capitalist order, business corporations remain quite reluctant to assume international
responsibilities, even with regard to the problems generated consequent of their global
negotiations and activities (De Rivero 2001, p.51).
A scrutiny of these contentious social concerns, at least from the moral perspective, would
suggest that they are issues which, ordinarily speaking, any responsible social institution or
member of society ought to be concerned about and be willing to attend to as much as is
reasonably possible. Hence, a question that should be asked amidst the debate over the social
responsibility of business is: why do critics of the idea of CSR deny that business has any
social responsibility beyond profit maximization for its owners? This question becomes more
pertinent if we consider two facts: First is that business entities, through, their activities
generate or at least complicate much of these social problems. For instance, “they frequently
generate unemployment, cause environmental damage or depend on complicity with
oppressive regimes” (De Rivero 2001, p.52). At least, the blame of the current global
economic crisis, along with all its attendant socio-political and socio-economic complications
can be laid squarely at the feet of a number of business (financial) corporations.
The second consideration is that government, as it exists today within the context of the global
capitalist economic order, has lost much of its traditional powers and is today handicapped to
directly address some of the relevant social concerns without compromising the ideal of the
free-market system. Today, in remaining faithful to the capitalist ideal of the free market
system, there is the quest to minimize governmental involvement in the economic sector and
any insistence that government should undertake certain socio-economic responsibilities might
be inconsistent with the free-market principle as it would necessitate an increased activity of
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
government in the economic sector. This would amount to a move away from capitalism and
towards socialism. Former President Bush recognized this given his remark, earlier referred to
in this paper, that in an attempt to facilitate a resolution of the global economic crisis, he
abandoned the free-market principles through governmental intervention.
6. Tension between Profit Maximization and Social Development
Finding an answer to the question on why there is the denial
responsibility beyond profit maximization above requires that we
between the quest for profit maximization by business and the
responsible in ways that would facilitate an overall improvement
stakeholders in society. To start with,
of any business social
understand the tension
demand to be socially
in the wellbeing of all
Everyone knows that men and women in business are
interested in one thing: money. And, as everyone also
knows, men and women in business will do anything
that has to be done to make money. That is the name
of the game. That’s what business is really all about
(Primeaux 1998, p.259).
The fundamental goal of business is to maximize profit and it demands that business is
“structured, people are hired, jobs are described, managers are held accountable, raw materials
are acquired and technology engaged” (Primeaux, 1998, 259) in ways that would ensure that
profit is effectively maximized. Everyone and everything in a business organization is to be
directed by and also expected to conform to the demands of profit maximization.
However, today, business organizations are also expected to respond positively to the demands
of CSR by attempting to resolve the contemporary social problems of “pollution, adequate
wages and benefits, safe, even pleasant working conditions, non-discriminatory personnel
policies backed by appropriate recruitment, training and even retaining programs, careful
husbanding of non-renewable resources, honest, informative advertising, production of safe
and durable products” (Camenisch, 1998, p.92). This presents a complication for business as
being socially responsible often involves the expenditure of additional funds that would erode
profits, which as far as business is concerned, it has a fundamental responsibility to maximize.
Critics present the relationship between the quest for profit by business and the demand that it
should enhance social development by being socially responsible as one of acute tension that
could hardly be reconciled. They contend that any considerations of issues pertaining to social
development by business entities “results in a deliberate sacrifice of profits or muddies the
process of corporate decision making so as to impair profitability”, which, according to them
business is all about (Smith 1998, p.252). Hence, business entities are usually reluctant to
respond to matters of social development as required of them by the ideals of CSR simple
because they often see doing so as eroding into the core of their very essence and reason for
existence: profit.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Other arguments have been presented by critics of the idea of CSR to justify the reluctance of
business to use its resources in pursuit of social development. Some are discussed by Smith
(1998, p.252) under the themes: competitive disadvantage, competence, fairness and
legitimacy. Nonetheless, for the immediate purpose, this paper focuses on only issues bearing
direct relation to the question of profit.
7. Reconciling Profit and Social Development
There have been various attempts to show that the quest to maximize profit is not necessarily
incompatible with the demand on corporate organizations to pursue projects of social
development. One of these attempts, that is quite convincing, thrives on two important
distinctions: First is the distinction to be made between profit in the short term and profit in
the long term. Although it might appear to be more profitable, in the short term, for businesses
to ignore issues of social development, but addressing these issues are more likely to deliver
greater and more sustainable profits in the long term. Below is a summary of an argument to
show that businesses tend to record greater benefits on the long run if they concern themselves
with immediate issues of social development even if doing so would entail sacrificing some
immediate profits:
Contemporary global reality is such, however, that
factors like unemployment, financial speculation,
currency fluctuation, poverty, and environmental
disasters, which predispose people to violence, are
becoming rifer, especially in developing countries
with dire consequences on global peace and stability.
Unless these factors are positively addressed, the
global society would become increasingly unfavourable
for the prosperity of TNCs. Consequently, TNCs should
attend to the problems that threaten social stability and
peace in order to guarantee the stable order required for
their continued existence and prosperity. At least, the
principle of enlightened self interest or prudence requires
TNCs to promote those social conditions that are favourable
to the pursuit of their preservation and flourishing
(Ekanola, 2006, p.287).
The second distinction is between the profit of individual businesses on one hand and the
wellbeing of the entire economic system of which businesses constitute a very important
component. This distinction, in turn, depends on the mutually reinforcing relationship between
specific businesses, the corporate sector and the economic sector as a whole. The widely
acclaimed primary goal of business, as we have stated repeatedly, is to maximize profit, but to
effectively do this, without any element of force or fraud, it must effectively meet the specific
needs of its customers. The satisfaction of these needs through an efficient production and
distribution of goods and services is, truly speaking, the ultimate end of any economic system,
be it mixed, socialist or capitalist. Thus, business entities along with their officials must come
to terms with the fact that the quest for corporate profit would only be effective and
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
sustainable if they effectively meet human needs which, in the final analysis, is all that issues
of social development are about: to ensure that society along with all its social institutions are
structured in such a way that human needs are met and human wellbeing is enhanced.
From another perspective, the position that business should have no social responsibility
beyond profit ignores the very important fact that their prospect of flourishing and making
profit is largely determined by the flourishing of the economic system as a whole. The case of
the current global economic crisis is again instructive as practically all businesses have
suffered, albeit, to different degrees from the decadence of the global economy. Many
companies have recorded a colossal loss with some driven to bankruptcy. Hence, it should be
evident to all that the fortune of specific business entities is intricately tied to the wellbeing of
not only the entire economic system, but of society as a whole.
8. Reconciling Profit and Social Development: Anyiam-Osigwe’s Cosmopolitan Ideal
Anyiam-Osigwe has a clear ethical position on business, especially as this relates to the
supposed tension between profit and social development. This is derived from his general
ethical position that moral issues do not begin with social institutions but with individuals. In
this regard, it can be said of him that he is in agreement with the position advocated by John
Maxwell that a state, business entity or even a family can only prosper on a foundation of
moral character, which does not start with the social organization itself but with the
individuals that constitute it (Maxwell, 2003, p16).
However, while Maxwell advocates the golden rule of morality as the principle that should
guide every aspect of life, including business, Anyiam-Osigwe advocates an ethical principle
that is cosmopolitan in that it emphasises the overall wellbeing of society, and considers this
as providing the context within which all kinds of individual interests, including the profit
maximizing interest of business entities, could be effectively enhanced. His position on the
relationship between the pursuit of profit and social development is given expression in the
corporate philosophy of the Anyiam-Osigwe Group of Companies cited at the beginning of
this paper:
For Anyiam-Osigwe, all stakeholders in society should adopt the cosmopolitan mind-set for
the global society to overcome all social contradictions and develop in a sustainable manner.
He contends that “the global eradication of ignorance and poverty, the attainment of holistic
development for all humanity, requires the cosmopolitan expression of the group mind
principle” (Charles Anyiam-Osigwe, 2002, p.8). His idea of cosmopolitanism advances the
enormous advantage of community among men irrespective of all prejudicial considerations
(Charles Anyiam-Osigwe, 2002, p.52). He conceives of a cosmopolitan as “one who conducts
himself/herself without the limiting prejudice of religion, culture, demography or any
subjective or personal interest that is not integral to the ideals of the common good and
collective will of the human community” (Charles Anyiam-Osigwe, 2002, p.48). Osigwe avers
that each individual, irrespective of position or profession in society, has a responsibility to
contribute his/her individual potentials and attributes into a common pool for the common
good of all in society (Charles Anyiam-Osigwe, 2002, pp.7-8, 48).
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
With specific reference to Anyiam-Osigwe’s conception of economic cosmopolitanism, he
affirms that a major hindrance in the path of the eradication of poverty and attainment of a
sustainable social development is the “social system that is constructed to serve a limited
vision and perception” (Charles Anyiam-Osigwe, 2002, p.68). Such limited vision and
perception, according to Anyiam-Osigwe, is borne out of the ignorance of the fact that “we are
all connected” and that “the web of life remains unbroken” (Charles Anyiam-Osigwe 2002,
p.16). This limited perception is also oblivious of the reality that “poverty anywhere in the
world makes the assumed wealth of a few countries illusory” (Charles Anyiam-Osigwe 2002,
p.57). Consequently, Anyiam-Osigwe is of the conviction that to record genuine social
development, all stakeholders in society have a responsibility to “moderate the propensity to
pursue self-serving goals at the expense of the common good” (Charles Anyiam-Osigwe,
2007, p.27).
Anyiam-Osigwe’s reference to the social system constructed to serve a limited vision and
perception, and pursue self serving goals rings true of the global capitalist system within
which it is generally accepted that the basic and direct responsibility of any business entity is
limited to maximizing profit for its owners, to the exclusion of any social responsibility to
pursue social development as this would encroach into its profit. This position appears myopic
from two distinct perspectives: First, the generally accepted role of business within the
capitalist order is based on a limited and illusory perception that the pursuit of profit by
individual business entities would somehow translate, by the workings of an invisible hand,
into the overall welfare of society, even though this is not part of the initial intention of
business (Friedman, 1988, p.349).
In truth, no modern society has truly developed in a sustainable way by a strict reliance on the
idea of the invisible hand, but by an understanding and exploitation of the interplay of a
complex of social, economic and political factors. In this light, Anyiam-Osigwe maintains that
holistic development, which is often referred to in contemporary terms as sustainable
development, can only be recorded through an interplay of the right personal values, an
adequate socio-political order and an efficient economic system (Ekanola, 2009B, p.69). The
American society and many of the Western European nations did not develop by a strict
reliance on the idea of an invisible hand within the free market system. They always took steps
to protect their national economies even when this is contrary to the free market principle.
This is quite obvious, even now, if we bother to consider the various measures governments in
the Western societies are taking to mediate the global economic crisis and keep key business
entities afloat.
The second perspective from which the idea that profit, to the exclusion of other social
concerns, is the only essential concern of business is myopic relates to the fact that it ignores
the intricate relationship between the activities of business and existing level of social
development: How business is organized and executed ultimately impacts upon the level of
social development (employment, social justice, social peace and environmental pollution, etc)
just as the level of social development, as indicated by access to such social amenities as
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
electricity, good water and social security, greatly influence the prospects of profit making on
the part of business.
Indeed, the position of the advocates of profit to the exclusion of other social responsibilities
may be well illustrated using what I call the paradox of the tick that is gradually killing itself
while it thinks that it is killing a dog. Ticks are tiny parasitic insects that feed on the blood of
several animals, including dogs, and in the process infect the blood. A tick infested dog might
eventually be killed by the tick infection. Interestingly, however, ticks cannot survive without
a host body and would also eventually die off after the death of the dog. Businesses that
neglect issues relating to the wellbeing of society fail to realize that their own well being is
tied to the wellbeing of society just as the continued existence of ticks is tied to the existence
of the host animal. The point being made essentially is that contrary to the belief that there is a
tension between profit and social development; the two are, in a significant way, mutually
reinforcing and any business entity that is interested in making profit in the long term and
ways that can be sustained must pay attention to issues of social development. Without this,
the quest for profit by business would eventually collapse. Thus, it is important for business to
realize that it cannot afford to ignore issues of social development if it is interested in long
term and sustained profit.
To effectively transcend the myopic perception that the only social responsibility of business
is profit and embrace a cosmopolitan mindset, Anyiam-Osigwe’s notion of reorientation and
intelligent re-engineering (Charles Anyiam-Osigwe, 2007, p.8) is instructive. This involves a
process through which members of society, irrespective of their status or peculiar function in
society are expected to internalize the appropriate values that would facilitate holistic
development in society. These values, in the opinion of Anyiam-Osigwe, are also expected to
guide all organizations and structures in society, as well as the pursuits and goals that are set
by all political, economic and other organizations in society. These values include “honesty,
dedication, simplicity, selflessness, justice, prudence, temperance and courage or fortitude”
(Offor 2009, 124). According to Anyiam-Osigwe, these values, when they have become
internalized and crystallized into an appropriate cosmopolitan mindset in members of society
hold the solution to the many and varied challenges
in all spheres of human existence and have through
the ages provided man with the inventiveness,
knowledge and understanding with which to conquer,
subdue and establish dominion over the continent
(Charles Anyiam-Osigwe 2004, 2).
This cosmopolitan mindset does not pursue just personal wellbeing but the wellbeing of the
community. In fact, it embeds the wellbeing of the individual within the development and
wellbeing of the community (Charles Anyiam-Osigwe, 2005, p.7). When this line of thought
is extended to business entities, it suggests that business must recognize that its interest and
wellbeing are embedded in the wellbeing of society at large and as such should realize that an
effective pursuit of the profit interest of individual businesses is dependent on the effective
pursuit of the overall social interest.
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To cultivate and internalize the cosmopolitan mindset, Anyiam-Osigwe prescribes a process of
education for all members of society that would achieve the primordial essence of education,
which is to instil a moral order in the individual and facilitate the holistic development of the
individual, irrespective of the position s/he would eventually occupy in society. An important
component of this holistic development of the individual is to make each person a good person
and a good member of society that recognizes and acts in accordance with the intricate
interplay of individual and social wellbeing.
If the above is brought to bear on both the owners and officials of business, the implication of
Anyiam-Osigwe’ position is that when they have been instilled with the requisite moral order,
they would always carry out their business activities in ways that respect and preserve the
interplay of the wellbeing of their business and the overall social wellbeing. They would also
engage in business in ways that would enhance economic growth and social development in
society with the understanding that it is only by doing so that their own quest for profit could
be realized in the long and sustainable term.
9. A Defence of Anyiam-Osigwe’s Cosmopolitan Ideal
Expectedly, the attempt to reconcile profit and social development using Anyiam-Osigwe’s
cosmopolitan ideal would have a good number of criticisms. For one, advocates of capitalism
and all it stands for would be quick to point out that it is somewhat socialist in orientation.
Capitalism is generally acclaimed in contemporary times to be more acceptable than socialism
because of the understanding that it has a better prospect of enhancing social development.
But, indeed, even the Western societies at the forefront of the advocacy for capitalism have
never been consistent in the practice of capitalism. There has never been a strict adherence to
the core principles of capitalism in spite of claims to that effect. For instance, there has never
been a total reliance on the invisible hand in the regulation of prices in the market place.
Rather, various systems of taxation, among other instruments, have been used to regulate
prices and also to protect home industries. Besides, if we consider the recent bail-out plans
adopted to keep major business entities afloat in the USA and other Western countries in
response to the global economic crisis, it is obvious that the notion of a free market is more of
a myth than reality. Likewise, the principle of the free market is not employed when it comes
to the movement of labour across national boundaries. Rather, it is subjected to strict
immigration laws that reveal a paradox inherent in the so called practice of the free market
system in Western societies.
What the above points at is that those societies that have attained appreciable level of social
development have done so, not on the basis of a strict adherence to the core principles of
capitalism but to an admixture of capitalism and socialism. Consequently, criticizing the
attempt to reconcile profit and social development by an appeal to Anyiam-Osigwe’s
Cosmopolitanism by saying it is socialist in orientation cannot stand. As we have mentioned
earlier in this paper, former President Bush of the USA was honest enough to admit that he
had to abandon the free-market principles in order to stabilize the American economy and the
overall wellbeing of members of society that was thrown into jeopardy in the wake of the
current economic crisis. In the final analysis, what would determine the plausibility of the
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effort to reconcile profit and social development using Anyiam-Osigwe’s cosmopolitanism is
the actual extent to which it is practicable, actually facilitates business profit in the long term
and enhances a viable synergy of profit and social development in the long run.
Critics might also attempt to undermine the plausibility of Osigwe’s cosmopolitanism in
reconciling profit and social development by a reference to the practice of TNCs to relocate
their business, especially manufacturing activities, to areas where there is already on ground
the kind of social environment and amenities requisite for efficiency in production and finally,
profit maximization. The argument would be that rather than allow the challenge of social
development in a given geographical location to undermine profit, TNCs are always quick to
relocate their core activities to the areas that are more suitable. This practice, critics might say,
is relatively easier and cheaper given the contemporary desperation of the world’s developing
nations and emerging economies to attract foreign investments. In Nigeria, for instance, the
fear is rife that many of the industries domiciled there are finalizing plans to relocate to
neighboring countries as a result of the insufficient and erratic supply of core social amenities
such as electricity, water, good road network and good social security
(http://allafrica.com/stories/200906230402.html). It appears that in the opinion of business
entities, it is more profitable to simply relocate than to deplete their profit in the effort to
contribute to social development.
It appears that decisions to relocate production are primarily taken on the basis of a
consideration of the availability of factors of production and perhaps accessibility to the
market. It also appears that not much consideration is given to the impact of such relocations
on existing market for the finished products: As people lose their jobs consequent of the
relocation of industries, they also lose the financial ability to purchase and consume the
finished products, resulting in the shrinking of the size of the market and ultimately the level
of profitability. This sequence of events is easily understood given that the massive loss of
jobs in recent times consequent of the global economic crisis has greatly impaired the
purchasing capacity of a great number of people and indeed the profitability of a good number
of business.
The penchant to relocate businesses to areas that offer social conditions that better facilitate
profit maximization is premised upon the illusion that it is possible for a business entity to
maximize its profit while other sectors in a given society and other societies are bedeviled by
various forms of problems. The social reality which might not be obvious to many is that
humanity along with all its social institutions are ultimately all connected (Charles AnyiamOsigwe 2002, p.16) in a way that poverty anywhere in the world makes the assumed wealth of
a few countries or the prosperity of some TNCs illusory. In this age of globalisation, with the
consequence of the world fast becoming “a global village”, the prospects to maximize profit
by a business entity would always be affected by the social conditions existing in societies
other than the immediate society in which its major activities are domiciled. Again, a
consideration of the current global economic downturn gives credence to this fact as what
started as a financial problem in the West, specifically the USA has generated a wide range of
human suffering worldwide, with the worst hit being those working in the export-producing
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factories, such as mining, textile and textile garments, metals and metal products, automobiles,
gems and jewellery, construction, transport and information technology, as well as tourism.
10. Conclusion
We have been concerned with the effort to reconcile profit and social development using
Anyiam-Osigwe’s cosmopolitan ideal. The thesis of the paper is that profit and social
development are not necessarily mutually exclusive but can actually be complementary. The
perceived tension between the two, to employ Anyiam-Osigwe’s description, is a product of a
limited understanding. A comprehensive understanding of the distinction to be made between
profit in the short term and in the long and sustainable term as well as the interdependence
between all social structures across the economic, political and even cultural domains reveals
that business would only record maximum profit and also be able to sustain this if it gives
requisite attention to other social issues pertaining to social development.
At the level of theory, Anyiam-Osigwe’s cosmopolitanism holds great promise to reconcile
the tension between profit and social development. The challenge before his position,
however, is that of how to actually facilitate a paradigm shift in the focus of business entities
in such a way that their quest for profit is always moderated by an objective consideration of
and a sufficient attention being given to the various social issues that affect the wellbeing of
members of society and ultimately their own prospect of maximizing profit.
In this regard, his prescription for a process of education for all members of society that would
instil a moral order in the individual and equip each person, irrespective of the position they
would eventually occupy in society, with the capacity to balance personal interest with the
common interests of all in society might be viable. However, it requires a critical examination
in order to determine exactly how this process of education should actually be set in motion.
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Özgür ÖNGÖRE
Vocational High School
Kastamonu University, Turkey
[email protected]
EUROPEAN EMPLOYMENT STRATEGY
AND TURKEY’S EMPLOYMENT POLICIES
Abstract
Turkey has a vital problem because of having high unemployment ratios for many years.
Turkey’s economy has grown for long years but it hasn’t been able to create any employment
opportunities. Because of that we could say the governments couldn’t find any solution for the
unemployment problem in Turkey. Therefore, new ways of creating job opportunities
especially for the young generations should be investigated. Many qualified people who are
graduated from universities couldn’t find any job and also many experienced people losses
their job because of economic crisis that appears periodically. According to this, some of the
economists offer flexible working type for the active employment market. And a few
economists offer the European Employment Strategy to make more people to join active
employment market. It would be analyzed the current employment policies and labour market
to evaluate the current position in Turkey. Meanwhile the European Employment Strategy
would be researched. This study focus on the European Employment Strategy and how it
could be applied to create new opportunities for people who couldn’t find any job even they
try to find.
Keywords: European Employment Strategy, Unemployment, Labour Market.
1. Introduction
After the Second World War, the reestablishment process of Europe had created the Social
Welfare States. In that term, full employment was provided by governments and social rights
were in secure conditions. In 1973 and 1974 two oil crisis was occurred then economic and
social indicators had began to decay. The rise of the oil prices caused the increase of
unemployment and the corruption of income distribution. In 1990s European countries became
much more far away from the social welfare model. Because of these unfavorable situations,
European countries had come together in order to fix the corruption of social structure so they
decided to establish a new employment model.
2. The Content and Improvement of European Employment Strategy
In 1990s, one of the most important problems in Europe was unemployment and the
employment rates were considerably declined (Kesici, Selamoğlu, 2005, p.25). The EES
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
emerged from a crisis in social policy that came to a head in the mid- 1990s. Welfare states
were under acute strain, and joblessness had risen dramatically (Trubek, Mosher, 2001, p.2).
European Union (EU) has been looking for an approach to solve the long run unemployment,
youth unemployment, insufficient employment level and unequal opportunity problems which
occurred from the beginning of the 1990s in labour force markets. The searching process is
creating the question if EU would continue by looking for new approaches to solve those
problems (Zengingönül, 2003, p.1). Rising unemployment and the associated income
disparities, social divisions and threats to stability and cohesion have major policy
implications (Rhodes, 1995, p. 38).
Recent actions by the European Union, especially in social policy and industrial relations,
reveal an increased use of alternative approaches to governance that are more accepting of
diversity and encourage semi-voluntary forms of co-ordination. This occurs under the
traditional Community method, as many recent directives tend to be relatively open and
flexible. But the move from top-down, uniform rules to more flexible and participatory
approaches can best be seen in areas like the European Employment Strategy (EES), also
known as the Luxembourg process, which departs radically from traditional regulatory
approaches (Mosher, Trubek, 2003, p.63). From a system perspective, social protection is
‘activated’ in the sense that the distributing of services and benefits mainly targets working
age people being in some sort of ‘work’ activities. It is also activated in the sense that funding
mechanisms and the allocation of resources are designed so as to foster increased job creation,
even to the point that, after the 2000 Lisbon strategy of the European Union, a revisited notion
of ‘full employment’ has returned to the political agenda. And indeed at EU level,
‘employment’ or ‘work’ has now tended to be seen as a panacea for all sorts of social needs,
certainly blurring the previous frontier existing between traditional social policy and social
protection associated to the status of being employed (Barbier, 2005, p.7).
These challenges coincided with a paradigm shift in thinking about progressive social policies
as Europeans began to realize that the welfare state itself could contribute in some cases to the
unemployment problem, and that increasing the employment rate was necessary in many
places to sustain generous benefits. Two issues helped force this shift. First, in many countries,
efforts to deal with unemployment by expansion of income maintenance programmes and
early retirement had led to relatively low levels of workforce participation, thus weakening the
fiscal base for the welfare state. Second, methods used to finance welfare state expansion had
made it harder to create low wage jobs and make work pay (Mosher, Trubek, 2003, p.65).
In 1990s the most important problem in EU was unemployment and there were concrete steps
to solve this problem in EU level. White Book which was published in 1993 was focused on
establishing an integrated Europe approach for employment field by determining the
ideological, political and analytical bases of this approach (Ataman, 2003).
The EES is a response from the sphere of employment policy (Mundlak, 2007, p.192). The
EES has been developed in order to encourage exchange of information and joint discussions
by all Member States, thus trying to find solutions or best practices together which could help
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creating more and better jobs in every Member State. The strategy consists mainly of a
dialogue between the Member States and the European Commission, on the basis of official
documents like the guidelines, recommendations and the annual joint employment report. This
is complemented by a dialogue between the European Commission and the social partners and
also the other European institutions, including the European Parliament, the European
Economic and Social Committee and the Committee of Regions. The Employment
Committee, which is formed of representatives of the Member States and the European
Commission, has a key role in the coordination of the objectives and priorities at the EU level.
These objectives are organised along common indicators and measurable targets concerning
employment (http://ec.europa.eu/social/main.jsp?catId=101&langId=en, European Commission,
12.04.2009).
The Guidelines proposed by the Commission and approved by the Council, present common
priorities to the Member States national employment policies. Since 2005, the employment
guidelines are integrated with the macroeconomic and microeconomic policies and are set for
a three year period (http://ec.europa.eu/social/main.jsp?catId=108&langId=en, European
Commission, 13.04.2009).
Recent actions by the European Union, especially in social policy and industrial relations,
reveal an increased use of alternative approaches to governance that are more accepting of
diversity and encourage semi-voluntary forms of co-ordination. This occurs under the
traditional Community method, as many recent directives tend to be relatively open and
flexible. But the move from top-down, uniform rules to more flexible and participatory
approaches can best be seen in areas like the European Employment Strategy (EES), also
known as the Luxembourg process, which departs radically from traditional regulatory
approaches (Mosher, Trubek, 2003, p. 63). Understanding the pertinence of ‘activation’ across
Europe and especially in the context of the EES leads to an exercise of balance between the
diversity of national trajectories and the identification of what precisely is common to all
countries. It also leads to accepting that the interactive processes of influence between EU
member states cannot be captured as simple influences from one to another country, or only as
a mechanical impact of the European level on the national. In the case of the EES, outcomes
should also be separated in outcomes in terms of adopting similar policies, and outcomes of
the said policies (in terms of employment, inequality, etc.) (Barbier, 2005, p.3).
The EES is a ‘soft law’ governance mechanism because there is no ‘hard’sanctions to ensure
adherence by the Member States to the guidelines (Mosher, Trubek, 2003, p.70). The
European Commission reviews national action plans of the member states and suggests
recommendations which are finally adopted by the Council of the EU. The recommendations
are not binding: they only express the EU’s views on national employment policies (Raveaud,
2007, p. 412). By the late 1990s, the already long-standing employment crisis worsened, and
critics began to argue more forcefully that there was a link between European economic
integration and layoffs. Deft lobbying and maneuvering by the Commission put subtle
pressure on Member States to use the EU to respond to the crisis. Under German pressure, the
Member States agreed to sign the Stability and Growth Pact. Some leaders believed that this
move could further alienate the public from the EU unless counterbalanced by action on the
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jobs front. This dovetailed with the need to respond to increasing criticism that the EU was not
relevant to ordinary citizens (Mosher, Trubek, 2003, p.67).
Progress has been made in recent years in the employment policy area. Unemployment has
come down considerably, and the overall employment rate has been growing strongly, on
average by about 1 per cent per year since 2005. Analysis suggests that there is evidence of
structural improvement in the functioning of labour markets. However, the economic outlook
has changed markedly over the last half year, owing to the financial, banking and credit crises.
Despite the emerging economic downturn, the impacts on EU labour markets have been
limited so far, at least in part due to greater adaptability of the labour markets coming from
recent years' structural reforms. With the exception of a small group of Member States where
employment fell, in all other Member States employment continued to grow in 2008.
Although the effects of the downturn on EU labour markets remain very uncertain, most
evidence suggests that the situation is expected to deteriorate sharply in 2009. Business
surveys in late 2008 pointed to a considerable weakening of employment prospects across
sectors. The economic climate indicator registered the largest decline in its history and
consumer confidence is at its lowest in 20 years (Council of the European Union, 2009, p.3).
3.European Labour Market
Two illustrations of the continued structural problems are youth unemployment and relatively
low participation in lifelong learning. Despite the significant reduction in youth
unemployment in 2007 in most countries, young people remain more than twice as exposed to
unemployment as the overall work force. Many Member States fall short of the new EU-wide
activation targets. Despite an increased focus in Member States, the levels of adult
participation in lifelong learning have barely increased between 2006 and 2007 and follow a
worrying declining trend in some Member States. These figures are a worrying sign for the
future since a substantial rise in investments in human capital better targeted towards labour
market needs is essential to close the productivity gap with our key global competitors
(European Council, 2009, p.6). The raise of unemployment especially for young people
needed to be solved urgently especially for the countries which have a large young population
like Turkey. Besides we shouldn’t forget that young people have full of working potential and
it is easy to educate them according to needs of the labour markets.
Governments need to exercise more qualified programmes for young people in order to make
their adaption to work life and increase their job satisfaction and work life quality. The result
of that sort of approaches would be ended by the decrease of the labour force turnover and
increase of the efficiency and the productivity of the labour force.
After the beginning of global finance crise, the flexurity of the labour force has become much
more popular “activation” than before. EU countries like Germany has began to use it to solve
the unemployment problem especially increased after the financial crisis. The aim of the
model is to discount the payments and working hours so as a result there would be no fired
employee.
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Figure -1: Employment versus Unemployment 2007
Source: Joint Employment Report 2008/2009, European Council, 2009, p.6
EUROSTAT estimates that 20.154 million men and women in the EU27, of which 14.158
million were in the euro area, were unemployed in March 2009. Compared with February, the
number of persons unemployed increased by 626 000 in the EU27 and by 419 000 in the euro
area. Compared with March 2008, unemployment went up by 4.061 million in the EU27 and
by 2.816 million in the euro area (EUROSTAT, 2009, p.1).
When we examine the employment data of Europe for 2008, it seems that Turkey is the lowest
country to establish employment opportunities for its labour force. Sweden, Denmark, Holland
and Norway are the ones which could be able to create the most employment ratios in Europe.
They have been able to exceed the Lisbon target which indicates that these countries still
continue to be welfare states. It precisely point out that Turkey should create a new
employment strategy which would help to increase the job opportunities especially for young
people and also to adapt its labour market to the Europe labour market.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Figure-2: Europe Region and International Employment Ratios (2008)
Source: EUROSTAT Database, 2010
As a result the labour force integration to EU would be smoother than expected. While making
the activation according to EES, Turkey has to consider that the main problem is the economy
has been growing without creating new employment opportunities. One of the main reason is
foreign entrepreneurs generally preferred deposit its money to local banks of Turkey which
offers high ratios of interests. And local and foreign investments to mass production sectors
has been made so limited and also by privatisation of the governments the public companies
becomes part of private sector without their real assets which also effect the labour market
negative.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Figure-3: European Union (27 Counties) Harmonised Unemployment Rates - 2008
Source: Eurostat Database, 2010
When we examine the EU, it clearly seems that the unemployment rates continue to increase
in the region. According to Eurostat data, the unemployment rates increased % 1, 7 from June
2008 to March 2009. Especially the global financial crisis effect the labour markets and many
employees lost his job. Therefore it is necessary to get the precautions which offer activations
like local employment applications to prevent economies from high unemployment ratios. The
EES displays soft activations for governments. By this way it is easy to form a local strategy
for each country according to needs of its own labour market needs.1
The euro area (EA16) seasonally-adjusted unemployment rate was 9.2 % in April 2009,
compared with 8.9 % in March. It was 7.3 % in April 2008. The EU 27 unemployment rate
was 8.6 % in April 2009, compared with 8.4 % in March. It was 6.8 % in April 2008. For the
euro area this is the highest rate since September 1999 and for the EU 27 since January 2006
(EUROSTAT, 2009, p. 1).
1
The euro area (EA16) consists of Belgium, Germany, Ireland, Greece, Spain, France, Italy, Cyprus,
Luxembourg, Malta, the Netherlands, Austria, Portugal, Slovenia, Slovakia and Finland. The EU27 includes
Belgium (BE), Bulgaria (BG), the Czech Republic (CZ), Denmark (DK), Germany (DE), Estonia (EE), Ireland
(IE), Greece (EL), Spain (ES), France (FR), Italy (IT), Cyprus (CY), Latvia (LV), Lithuania (LT), Luxembourg
(LU), Hungary (HU), Malta (MT), the Netherlands (NL), Austria (AT), Poland (PL), Portugal (PT), Romania
(RO), Slovenia (SI), Slovakia (SK), Finland (FI), Sweden (SE) and the United Kingdom (UK). (EUROSTAT,
2009:2)
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Figure-4: European Union (27 Counties) Harmonised Unemployment Ratios (2009)
Source: EUROSTAT Database, 2010
The increase of unemployment rates from 2008 to the present time continue to grow especially
after the financial crisis occurred in USA and then effect the world including Europe. The EU
27 region the unemployment rate was increased up to 9.6 % in December 2009. According to
the current EUROSTAT data, the unemployment rates were increased 1.6 % in a year from
January to December 2009. The euro area (EA16) seasonally-adjusted unemployment rate was
10.0 % in December 2009, compared with 9.9 % in November. It was 8.2 % in December
2008. The EU 27 unemployment rate was 9.6 % in December 2009, compared with 9.5% in
November. It was 7.6 % in December 2008. For the euro area this is the highest rate since
August 1998 and for the EU 27 since the start of the series in January 2000 (Eurostat News
Release Euro Indicators, 5/2010).
EUROSTAT estimates that 23.012 million men and women in the EU27, of whom 15.763
million were in the euro area, were unemployed in December 2009. Compared with
November, the number of persons unemployed increased by 163 000 in the EU27 and by 87
000 in the euro area. Compared with December 2008, unemployment went up by 4.628
million in the EU27 and by 2.787 million in the euro area (EUROSTAT, 2010, p.1).
When we examine the employment data of Europe for 2008, it seems that Turkey is the lowest
country to establish employment opportunities for its labour force. Sweden, Denmark, Holland
and Norway are the ones which could be able to create the most employment ratios in Europe.
They have been able to exceed the Lisbon target which indicates that these countries still
continue to be welfare states. It precisely point out that Turkey should create a new
employment strategy which would help to increase the job opportunities especially for young
people and also to adapt its labour market to the Europe labour market.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Figure-5: Unemployment Rates Comparing Regions and Countries
Source: EUROSTAT, 2009
In April 2009, the unemployment rate was 8.9 % and in December 2009 it was 10.0 % in the
USA. In Japan the unemployment rate was 4.8 % in March 2009 and it was 5.2 % in
November 2009. It seems that not only in Europe but also in Japan and USA the
unemployment rates continue to increase. In December 2009, the youth unemployment rate
(under-25s) was 21.0% in the euro area and 21.4% in the EU27. In December 2008 it was
17.0% and 16.9% respectively. The lowest rate was observed in the Netherlands (7.6%), and
the highest rates in Spain (44.5%) and Latvia (43.8% in the fourth quarter of 2009). Among
the Member States, the lowest unemployment rates were recorded in the Netherlands (4.0%)
and Austria (5.4%), and the highest rates in Latvia (22.8%) and Spain (19.5%) (EUROSTAT,
2010, p. 1).
Figure-6: Unemployment Rates Comparing Regions and Countries
Source: EUROSTAT, 2010
In European Region the unemployment rates fluctuate after 2000. The unemployment rates
which range between 8 % - 9 % decreased to 6.5 % in 2005. After the second half of the 2008,
the unemployment rates began to increase and still continue. It points out that 2005 and after,
the success caught by the governments against the unemployment were temporary. The
financial crisis occurred in 2008 effected all Europe countries economics and it could be
predict that the unemployment rates would continue in long run if new activations couldn’t
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find for the solution of unemployment. When we compare the EU and EA, the EA 16’s
unemployment rates are more than EU 27. This could be analyzed as the effects of the crisis
have seen less when the number of examined countries increases for Europe.
European Union Council has succeeded against unemployment when we consider the three
years passed from 2005 until the financial crisis. Meanwhile in this term the employment rates
continue to increase.
4. The Local Employment Programmes Applied in EU
The European Employment Observatory (EEO) contributes to the development of the
European Employment Strategy through the provision of information, comparative research
and evaluation on employment policies and labour market trends in the countries covered by
the EEO. The EEO improves the information base for policy makers of the European
Employment
Strategy
and
other
stakeholders
(http://www.eu-employmentobservatory.net/en/about/index.htm, EEO, 29.04.2009).
In Bulgaria, the 2009 Plan for Employment was approved and included measures to overcome
the anticipated employment slowdown due to the economic crisis (EEO, 2009, p.2). In
Bulgaria, the Council of Ministers adopted the National Lifelong Learning Strategy on 30
October 2008. It defines the vision, purpose, principles, and measures for development of
lifelong learning at different stages of the lifecycle, and priority directions and main indicators
for progress evaluation. It could be assumed that the strategy will have an overall positive
impact on adult learning development, the workforce and the recognition of experience skills
and knowledge (EEO, 2009, p.22).
In Poland, the provision of possibilities for development and a high living standard for citizens
are aimed. The NRP reforms aim mainly at the creation of a foundation for stable
socioeconomic development and improvement of living standards.
In Portugal, the Initiative for Investment and Employment (IIE) was presented in the last
quarter of 2008. Nearly EUR 580 million will be allocated to temporary measures to support
employment. In order to reduce the negative effects of the downturn on employment and
economic growth, the IIE articulates measures to support national firms, mainly through credit
lines and specific training programmes for their employees and employment policies that
expand incentives to firms to hire new workers, and increase the number of internships for
young people (EEO, 2009, p.4).
In Sweden, in December 2008, the Autumn Budget Bill has been approved by the Swedish
Parliament. In order to counteract the effects of the weaker economic environment, the impact
of the financial crisis and to sustain employment a package of measures amounting to SEK 32
billion (EUR 2.9 billion) will be implemented. It includes a number of reforms aimed at
further enhancement of work incentives and strengthening of the labour market integration of
vulnerable group (EEO, 2009, p.4):
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
•
•
•
•
•
•
•
A third step in the already implemented in-work tax credit and a reduction of state
income tax took effect in January 2009.
The Government proposal to further reduce corporate taxation and improve conditions
for small and growing enterprises has also been adopted (the tax reduction for
businesses amounts to SEK 16 billion – EUR 1.45 billion).
Further measures to strengthen integration for non-natives have been launched,
allocating SEK 900 million (EUR 81 million) to help newly arrived immigrants to
become established in Sweden.
As far as measures targeted at young people are concerned, the employers' social
security contribution for young people has been lowered to 15.49 % and the age group
has been broadened to cover everyone under the age of 26 at the beginning of 2009.
As far as education policy is concerned, measures are introduced for increasing the
educational component in preschool by an expansion of universal preschool to include
three-year-olds, a childcare voucher system, and a clarification of the preschool
curriculum and enhanced further training for preschool teachers and childcare workers.
Furthermore, the government will take measures to reinforce basic skills, such as
reading, writing and arithmetic as well as to expand apprenticeship programmes at
high school level and vocational training.
As far research and development is concerned, extra resources have been allocated
(around SEK 15 billion – EUR 1.36 billion) over a four year period with a special
focus on research in medicine, technology and environmental sciences.
In the UK, the Prime Minister convened an Employment Summit in London on 12 January
2009 to bring together key stakeholders to underline the government’s concern over the effect
of the recession on the labour market and to set out extra support measures – as well as to
encourage employers to help tackle joblessness. The emphasis was on reaffirming the
government’s commitment to helping the unemployed and young people entering the labour
market and announcing some additional funding to the more general £10 billion (EUR 10.76
billion) fiscal stimulus announced in the November 2008 Pre-Budget Report. More
specifically, the extra funding of £500 million (EUR 537 million) would be spread over a two
year period and focused on people out of work for over six months and includes measures
such as ‘Employer’s Golden Hellos’, whereby incentives of up to £2.500 (EUR 2.689) would
be paid to employers who recruit and train unemployed persons. There would also be new
training places created to help the unemployed match their skills to the half a million
vacancies currently in the labour market. Other actions within the package include workfocused volunteering options and help with setting up a business (EEO, 2009, p.5).
National policies are considered under the following Integrated Guidelines as EEO concerns
for the Europe according to the EES for attracting more people to enter and remain in the
labour market (EEO, 2009, p.5):
Promoting a lifecycle approach to work, which calls for action in attracting to, and retaining
in, the labour market young people, women, older workers, as well as reconciling work and
private life, providing affordable childcare facilities and modernising social protection
systems;
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•
•
Ensuring inclusive labour markets, and especially, implementing active labour market
measures to help jobseekers and those furthest away from the labour market, reviewing
incentives to work and developing new sources of jobs;
Improving the matching of labour market needs, and especially modernising labour
market institutions, encouraging geographical mobility and managing economic
migration.
To decrease the unemployment of young people there are several projects which arranged by
governments in Europe. For instance in Spain the government decided to apply an education
programme which involves the education of youth between 18 – 24 years old according the
needs of labour market. That will allow young people to combine enrolment in official
professional training with part-time work. In Australia to increase the number of employed
young people and apprenticeship trainings places; the government decided to establish
apprenticeship places in the special training institutions in which apprentices may serve their
whole apprenticeship (EEO, 2009, p.6).
To increase the participation of women in labour market, there are several projects in Europe.
In Poland, the amendment of the Labour Code (the so-called ‘Family Act’) has introduced
wider rights for employees in relation to parenthood. In particular, maternity leave has been
lengthened and will be divided into two parts from 2010: basic and optional. The optional part
is to be extended in the coming years. The Act, among other provisions, introduces: paternity
leave; the possibility of financing childcare from the Company Social Benefits Fund
resources; and lengthens (to 270 days) the period of receiving the benefits for pregnant women
who are on sick leave (EEO, 2009, p.8). In Turkey, in December 2008, the Turkish Quality
Association KALDER published an agreement between businesses and NGOs, entitled
‘Management is a right for women, too.’ KALDER has already signed up Türkonfed
(Confederation of Industrialist and Businessmen (sic) Associations) and some large
corporations to its cause. At the time of the news article, KALDER was aiming to secure the
signatures of influential businesswomen in Turkey (EEO, 2009, p.7). The Personnel
Management Association PERYÖN established a partnership with Prime Ministry, Social
Services and Child Protection Agency and Turkey Employment Agency according to a project
which has been focused on increasing the participation of young women between 18-24 ages.
The purpose of the project has been explained as below:
(http://www.peryon.org.tr/nartaneleri.asp, PERYÖN, 09.07.2009)
• Defeat poverty of women
• The increase of women employment
• Prevent women violence against women
• Create self confident young women
• Increase the partnerships between civil society, public and private sectors
There is, of course, a pressing need not only to understand what has happened and why, but
also to act so as to prevent the worst scenarios from coming about. Furthermore, for those who
have for years advocated more far-reaching structural reform agendas there is a sense that
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
current circumstances constitute a rare opportunity that should not be wasted (Blankenburg,
Palma, 2009, p.532).
In Belgium, unemployment benefits have been increased. In Romania, to help enterprises to
maintain the workers laid-off temporarily as a result of the global economic downturn, the
new government will exempt all payments made by enterprises under the so-called “technical
unemployment” schemes from social insurance contributions for a period of three months.
In UK, The Department of Innovation, Universities and Skills (DIUS) announced in October
2008 that extra funding would be made available to those facing redundancy as a result of the
economic crisis. The focus is on helping them retrain and develop new skills so that a
replacement job can be found as quickly as possible in the same enterprise or another one.
Activities to be funded include gaining new qualifications or on-the-job training.
National policies are considered in relation to the following EU Integrated Guidelines (EEO,
2009, p.19):
• Expanding and improving investment in human capital, especially improving access to
vocational and higher education, and developing efficient lifelong strategies and structures
to increase participation in training throughout the working life of the individual
• Adapting education and training systems to respond to new competence requirements, and
especially, improving the definition and transparency of qualifications, easing the access to
education and training and raising the quality of provision to ensure flexibility in learning.
In Austria, to make existing further training leave more attractive, regulations were modified
for a new model of ‘Further training leave plus’. Employees can take leave of between three
and 12 months and receive an allowance equal to the amount of the unemployment benefit to
cover the cost of living. The new aspect of this model is company-based training. To comply
with the regulations, companies have to organise training according to their particular skill
needs and it has to be provided by external training institutions. Half of the training costs are
funded by the provincial government. This model is intended to encourage companies to
invest in the training of employees and give them an incentive to keep their employees during
the economic crisis.
In France, in relation to the reform of vocational training, trade unions and employer
organisations agreed that lower-qualified workers and jobseekers should benefit from
vocational training opportunities. A dedicated fund to secure professional paths will be
established in 2010. Trade unions and employer organisations agreed that an additional 500
000 low qualified workers and 200 000 jobseekers should benefit from vocational training
opportunities each year. However, the reform of high school education has been officially
suspended, after opposition from students, teachers and parents (EEO, 2009, p.19). The
Meeting of State Secretaries in Latvia reviewed the attractiveness of the professional
education, and the participation of social partners in ensuring the quality of professional
education. The aim was to enhance the attractiveness of vocational education and promote
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
cooperation between employers and the state in the development of vocational education and
employment policies (EEO, 2009, p.21).
Figure -7: Policy Context of EES
Source: EEO, 2009, p. 32
The European Community have revised the EES indicators according to the current needs of
Europe countries. However unemployment rates still continue to increase in Europe. On the
one hand it has been known that the EES has a flexible structure which makes it difficult to
guide member countries to produce more laws and regulations to protect social rights of
labours and create equal opportunity for social exclusion groups. On the other hand as we
analyzed here the current studies have done by the member countries of the Community
according to the EES, Europe couldn’t be able to decrease the unemployment rates. Therefore
the EES couldn’t be a solution to make the labour market healthier with its current structure.
But it might be used to protect the current situation of the labour market.
5.Turkey’s Labour Market
Turkish Employment Organisation, İŞKUR has been working for the improvement of the
labour market and establishment of a national employment policy. Meanwhile the organisation
is responsible for the integration of the national labour market according to the Europe Union
decisions and applications. Therefore İŞKUR has been supporting NGOs which establish
projects for the active labour market. These projects are generally established by the
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
participation of NGOs and other organisations like local trade chambers, universities. Turkish
Employment Organisation is an affiliated organisation of the Ministry of Labour and Social
Security and is an administratively and financially autonomous public institution, which is
subject to special law provisions, and has a legal entity (Official Gazette, 2003).
The Turkish labour market is characterised by low labour force participation rate. Labour
Force Survey data for 1988-2006 reveal that the population between 15-64 years of age
increased by 48 % whereas employment rate increased only by 24 %, reflecting nearly 50 %
of labour force participation throughout the period. The average labour force participation rate
for the EU25 in 2006 was 70.5% compared to 48.0 % in Turkey (The Active Labour Market
Measures Grant Scheme, 2008, p.4).
In 2008 annual unemployment rate is 11 % which is 1.8 % more than 2007 annual
employment rate. When 2009 unemployment rates are examined, it seems that the
unemployment rates begin to increase from January to April. Especially in October 2008 the
unemployment rate become to 15.5 % which is 11.6 % in October 2008. When it is examined
more current data, in April 2009 the unemployment rates begins to decrease. 0.9 % decrease in
April and in May 2009 1.3 % decrease in a month. But the current unemployment rates which
is 13.6 % in May 2009 still higher than 2008 unemployment rates which is 9.2 % in May
2008.
There are several indicators which explain that participatory democracies provide enable
higher-quality growth which means they allow greater predictability and stability, are more
resilient to shocks, and deliver superior distributional outcomes. (Rodrik, 2000, p. 3) Some of
the economists says that the negative effects of financial crisis occurred in 2008 begins to
dismiss. But it is clear that still unemployment rates are higher than 2008. In the beginning of
2009, only two months (January and February) there was a decrease of unemployment rates.
And then it has begun to increase again. So it is early to predict whether the Turkish labour
market would be healthier than the past two years in 2010.
Figure-8: Labour Force Status by Non-Institutional Population and Years
Source: TURKSTAT, The results of Household Labour Force Survey, 2009
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Primary school graduates are the largest group that are unemployed. The second unemployed
group is junior school graduates. The order is same for both years 2007 and 2008. But at the
third unemployed group, literate passes bachelor’s degree (fourth) and two years university
education (fifth) groups. It shows that the financial crisis effects unqualified labour force than
qualified labour force. For both years illiterate is the sixth, unemployed master degree
graduates and doctorates are last workless groups according to education. It has already
known that the percentage of Master or PHD graduates is very few. So it is normal to receive
few unemployed ratios from these groups.
Majority of people admitted to İŞKUR are qualified labour force but the majority of the
demand is for unskilled labours. Therefore the majority of the placements have been done for
unskilled labour force (İŞKUR, 2009).
Figure-9: Applications to İŞKUR for Job in 2007-2008 Distribution by Educational Levels
Source: İŞKUR, 2008
According to TÜİK, Turkey has limited time to take the advantage of its high youth
population because the population growth rate has decreased. Therefore TÜİK suggests that
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
the investment should be done to solve the youth unemployment (Promoting Youth
Employment Grant Scheme, 2009, p.4). It is clear that new investments and policies must be
done to solve the unemployment problem. But it shouldn’t be forgotten that Turkey’s
population growth if still continue as fast as before, the financial crisis would be much more
destructible than now. Because Turkey’s economy couldn’t be able to create job opportunities
for its work force even it grows.
6.Turkey’s Employment Policies
There are 101 projects which are accepted for the measure of active labour market
programme. The biggest budget of these projects has been applied by Ankara Maturing
Institution and the grant amount was determined as 320.758,69 €. The goal of this project is
“an effective move from education to the employment with the cooperation of education
institutes and the enterprises”. The accepted projects would be organised by Non
Governmental Organisations (NGOs) like labour and employer’s unions, foundations; and also
high
schools,
universities,
mayoralties
and
other
public
institutions.
(http://statik.iskur.gov.tr/tr/ihale/AB_ihale/101%20proje.pdf, 17.07.2009) The durations of
these active labour market programme projects have been limited to 12 months. The locations
have been chosen from different regions of Turkey.
There are also vocational education courses for the citizens whish has been given by İŞKUR.
These courses involve many types of education programmes depending on the occupational
needs of the labour force. Some of these courses also guarantee job after the end of the
education.
“Promoting Youth Employment” (PYE) and “Promoting Women’s Employment” (PWE) had
been announced by Central Finance and Contracts Unit (CFCU) and applications had been
done according the schedule. İŞKUR announced the accepted projects. The fund of the
projects has been supported by the European Union Funds. Therefore only small percentages
of these projects are founded by Turkish Government. Generally % 15 of the grants is founded
from the budget. For each project, CFCU has been announcing the deadlines and schedule that
the NGOs and other partners should obey to accomplish the goals. The agreements of the
accepted projects have been done by Central Finance and Contracts Unit. In these projects
İŞKUR is responsible for the technical monitoring and implementation of the Grant Scheme.
Majority of the projects supported by İŞKUR and EU are short run term and focused on
education. But according to TÜİK Statistics (TURKSTAT), university graduates also
unemployed in Turkey. Therefore it is not enough to educate labour force.
In addition, a law allowing temporary employment agencies to employ temporary workers,
dependent on demand in the labour market, has “again” been proposed in the parliamentary
assembly, amid strong criticism from the social partners (EEO, 2009, p.10).
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Conclusion
Turkey needs to prepare a comprehensive women employment policy and a national
Employment Strategy (Ataman, 2008, p.6). While Turkey establishes its own employment
strategy, it could be integrated with EES which would be benefit for the country. By a national
employment strategy, labour market improvement and entrepreneurship support could be
settled. A comprehensive national employment policy including a national employment
strategy is urgently needed. The strategy would be for long run and it should be supported by
necessary social policy applications for the success of the employment strategy. Turkey
couldn’t be able to succeed against unemployment. One of the reasons of this unemployment
problem still continues is social policies up to now have not been established for long run
term.
Turkey needs to produce economic policies which would give priority to investments and
protect current productivity. The majority of current employment policies support the
education of labour force. But we have already known that educated people also couldn’t find
job especially in Turkey. It is clear that educate the labour force, increasing the consumption
of citizens, supporting the import of goods and services and high interest rates given by banks
wouldn’t be enough for the solution of unemployment. The main point is the establishment of
a national policy for employment. A national employment policy could help to organise the
local policies which has been already supported and eliminate the ones which consumes the
valuable assets for insufficient results.
Therefore it is necessary to create a national policy which would aim to create job
opportunities for unemployed people in Turkey by establishing suitable conditions for
entrepreneurships like arrangements of laws, economic or infrastructure supports. The
privatisation of profit making public institutions like Ziraat Bank, Halk Bank, PTT (Public
Postal Service Institution) and non profit making but strategic institutions like Machine and
Chemistry Industry Institution (MKEK) wouldn’t be a good decision to support employment
or increase the power of economy. The privatization of profit making organisations gives only
short run financial source and privatisation of strategic institutions creates disadvantage for
national security. We have already known that there is a huge unemployment insurance fund
accumulated in Turkey. It could be use to support the national employment strategy which
gives priority for entrepreneurs.
Decreasing the social rights of workers and applying neo liberal policies to Turkey’s labour
force market which is already flexible won’t be a solution for unemployment. Neo liberal
policies create a dual effect on labour market and increase the division of labours. As a result
labour’s unions losses its endurance and collective bargaining power against employers and
employer’s unions.
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Kesici, Mehmet; SELAMOĞLU, Rauf Ahmet, (2005). “Genel Hatlarıyla Avrupa İstihdam
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Chen JINGYUAN
School of Finance
Nanjing Audit University, China
[email protected]
Xue XUE
School of International Auditing
Nanjing Audit University, China
[email protected]
THE INFLUENCE OF EXPRESSWAY CONSTRUCTION SCALE
ON TOLL FARE FROM THE VIEW OF ECONOMICS
Abstract
The toll fare can be seen as the market price of the service of expressway construction, which
reflects the relation of voluntary transactions between the consumer transportation and
expressway, this paper regards the service of expressway as Quasi-public Goods and also
constructs a model of its market price. We can make further discussion about the toll fare
based on the L-model and U-shaped curve existed between the toll fare and the expressway
construction scale, as well as the supply and the demand between them.
Keywords: Model of Market Price, Quasi-public Goods, L-model and U-shaped Curve.
1. Introduction
The question of toll fare is related to those who use expressway transportation as well as their
families, which is a sensitive and complex problem. Higher toll fare will make a lot of
complaints stemming from customers but lower toll fares will not guarantee the quality of the
services on the expressway because of insufficient financial resources, so it’s of great
significance to do research into this topic. This paper set up an appropriate mathematical
model to make deep discussion on the relationship between the toll fare and expressway
construction scale.
2. Model of Market Price
According to the America’s economist Paul A.Samuelson's public goods theory, the service of
expressway belongs to quasi-public goods, which means it has a certain extent competition,
but exclusive, it’s also known as semi-public goods.
On the one hand, see from the respect of consumption, service of expressway is competitive,
one person affected by the expressway will reduce the chances of others’s access. On the other
hand, see from the respect of consumption, service of expressway is also exclusive, because
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
the consumption of road is non-integrated, and it is technically easy to intersect, some people
can be excluded from the consumption of expressway. Therefore, the expressway service has
the two characteristics as follows:
• The cost of providing the good increases less than proportionately to the number who
benefit from it.
• There are some difficulties in excluding those who do not pay from the benefit of the
good.
So the expressway belongs to quasi-public goods.
Toll fare’s price should be determined by market as quasi-public goods. And it has the
characteristics of the general commodity’s price formation mechanism; in addition, it also has
some common ground with public goods and monopoly goods’ price formation mechanism.
Expressways are the providers of transportation, the market price is determined by the
relativities of supply and demand under market economy. If the demand maintains a relatively
stable condition, according to the basic principle of economics, it can be concluded that the
more supply of transportation, the more opportunities of transportations will be provided for
the market, as a result, the competition will be more intense and the price will be
correspondingly reduced. On the opposite the price will rise; and if the supply of
transportation services remains relatively stable, the greater demand for transportation, the
more intense competition will be when people use expressways, and the price will rise, on the
contrary, the price will reduce.
Here we use a quadratic function to study moderate scale of expressway, at the same time we
can introduce the concept of scale economy to expressway scale, which means the proportion
of the number of people who use transportation increase is higher than the proportion of the
unit cost of people who use transportation, and the average cost of a unit will be reduced with
the increasing number of people who use transportation..
We can take the investment process of transportation resources as a long-term investment
process. According to economics theory, it is assumed that the long-term average cost is LAC
and its function is a "U-type" shape, that is, in the framework of low production, LAC is
declining, in the framework of higher production it is raising. The figure can be seen as
follows:
Fig.1: Long-term average cost curve of investment in education
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
From Q1 to Q2 we can see that there exists scale economy; from Q2 to Q3 there exist
diseconomy of scale. The peak in the "U-type" curve means the smallest LAC, which is lowest
point of the average cost of the users, and the number of users corresponding can be regarded
as the optimal size of the number of users which is the best economy of scale.
The long-term average total cost function expression as follows:
LAC = b + cQ + dQ 2
Marginal cost as follows:
MC =
Define MC=0, then
Q=−
dLAC
= c + 2dQ
dQ
c
2d
So, it is the best economy of scale of expressways when the number of students in school is
c .
−
2d
It can be seen that after introducing the price mechanism, the regulate role that the toll fare
plays in transportation can be exerted completely, we have to set different toll fare standards
for expressway to promote the rational allocation of resources according to different
transportation supply (that is, the scale of expressway), so that we can meet the needs of all
sectors of social demand to promote sustainable development. The figure can be seen as
follows:
Fig.2: The relationship between the toll fare price and the expressway scale
From the demand we can see that when the scale of Suppliers and demanders reach in balance
then the toll fare prices will be the lowest.
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3. L-model and U-shaped Curve
The economic value of L-model is that after resources are fully utilized, it can still cause
economy of scale if investment is continuing. The curves exist between the average cost of
every individual who uses expressway and the number of people is linked by many U-shaped
curves, it can be seen as the highest cost of every individual when the expressway started
among all the U-shaped curves. After that, with the number of individual users increasing, the
average cost of every individual will fall. The figure can be seen as follows:
Fig.3.The curve between the average cost of every individual and expressway scale
U1 is the U-shaped curve when the school started, the average cost of every individual has a
rapid decline with the expansion of scale . U 2 − U 5 is the U-shaped curve that when the
continuing investment reach a certain amount, the increased resources will have only a little
influence on the average cost of every individual when the number of individuals reached the
largest, and the average cost of every individual will have a downward fluctuation. Therefore,
after the expressway went through a minimum size with making full use of the resources when
it started, then the average cost of every individual will be maintained at a minimum level with
continuing investment and expanding size, which is maintained at scale economy. And we can
obtain the hyperbolic model- L-model after having regression analysis on the data about the
average cost of every individual and the number of individuals.
The standard type of hyperbola is:
Y2
α2
−
X2
β2
C2
α
2
= 1 ,that is
−
Q2
β2
=1
the relation can be concluded as follows:
C = a + b /Q,
define
dC
= 0
dQ
the answer is
−b
= 0
Q2
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−b
dC
=
dQ
Q2
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Define
b
= 0
Q 2
, and the value of Q is infinity, which means the larger, the better. But actually
it can’t find the number of individuals that in optimum size. In other words, the scale of the
expressway can not be unlimited expanded, or it will cause the diseconomy of the scale of
transportation
4. The Solution to the Model (take china as an example)
Take China as an example; take the scale of enrollment, the average GDP and the average cost
of education as the research objects, the data in 2000-2005 can be seen at table 1:
TAB.1: THE DATA OF CHINA EDUCATION IN 2000-2005
year
2000
scale of
enrollment(people)
22060
average GDP
(dollar)
1122.525156
average cost of
expressway(dollar)
181.546964
2001
26827
1231.672317
184.820891
2002
32049
1342.579208
191.294657
2003
38217
1505.995877
187.422359
2004
42000
1762.225377
194.112154
2005
504000
2014.760869
209.235696
The growth rate can be calculated at table 2:
TAB.2: GROWTH RATE
Year
growth rate of the
scale of enrollment
growth rate of
average GDP
Growth rate of
average cost of expressway
2001
21.61%
9.72%
1.67%
2002
19.46%
9.00%
3.93%
2003
19.24%
12.17%
-1.98%
2004
9.90%
17.01%
3.65%
2005
20.00%
14.33%
7.55%
Through the analysis we can conclude that with the continuing expansion of the scale of
enrollment, besides the influence of the average GDP, the average cost of expressway
transportation is also reducing, which can be seen from above. From 2000 to 2005, the growth
rate of average cost of expressway transportation reduced from 1.67% to -1.98%, and then
raised to 7.55% in 2005, but except the influence of the average GDP, the cost is reduced
relatively, and the scale of expressway transportation is also tend to optimize. So the only way
to make the average cost of education minimum is to control the scale of expressway
appropriately when expanding the number of individuals.
Conclusions
From above we can get that the service of expressway is taken as quasi-public goods and its
toll fare obeys the market discipline. The cost of expressway can be minimize with
appropriately control of the scale of expressway transportation and good allocation of
resources, which can reduces the toll fare.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
References
Paul A. Samuelson (1954). The Pure Theory of Public Expenditure.
Jo Ledyard (1995). A Survey of Experimental Research. The handbook of experimental
economics.
Liang Guoye, Liang Jianping (2004). Mathematics modeling..Yejin Technology Press.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Emel ÖZGENÇ
Faculty of Economics and Administrative Sciences
Gumushane University, Turkey
[email protected]
Hasan AYYILDIZ
Faculty of Economics and Administrative Sciences
Karadeniz Technical University, Turkey
[email protected]
AMBUSH MARKETING: A RESEARCH TO SPECIFY CONSUMER’S
KNOWLEDGE ABOUT AMBUSH MARKETING
Abstract
Sponsorship is an important advertising tool. Because of the high fees of sponsorship and
also effect of crisis, most of the firms incline ambush marketing activities. Although the
number of the firms that incline ambush marketing is increasing, consumers haven’t
sufficient information about this subject. So, the aim of this research is to specify the
consumers’ knowledge about ambush marketing. Data is acquired by the way of conducting
survey to 414 customers of face to face is subjected to factor analysis. The data analyzed
shows that important part of the consumers have no information about sponsorship rights and
ambush marketing strategies.
Keywords: Ambush Marketing, Sponsorship, Parasitic Marketing.
1. Introduction
The concept of sponsorship has appeared in our lives in many ways from past to present. The
sponsorship previously for charitable purposes is thought today as an important vehicle for
advertising. According to Asna, (1995, p.4) “the sporsorship is an activity whose efficiency
is able to be evaluated and which both assists in human being and the society and benefits to
the sponsorring organization.” It has developed more and more and the numbers and
investment amount of organizations investing in the sporsor-ship have been on increase in
paralel with this development. With the increase of the sporsor-ship expenditures, the
companies not bearing any titles have found creative ways and headed towards the concept
called as ambush marketing in order to associate themselves with the organization.
The concept of ambush marketing was firstly experienced between Fuji and Kodak in 1984
Olympics and became a strategy began to be used widely in the organizations after that date.
Ambush marketing is a concept coming to light with other companies becoming the rival of
official sponsors to try to attract the spectators’ attention to themselves. According to Sandler
and Shani (1989, p.10), ambush marketing is a planned activities which provide a business
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
enterprise indirectly to associate itself with an organization for the purpose of benefit and
recognition about official sponsor-ship.
There are many reasons directing the companies to ambush marketing. One of the most
common reasons at the present day is that sporsor-ship expenditures are too much. The
expenditures of sponsor-ship have reached the huge figures year after year and the
opportunist firms which do not want to pay million even billion dollars so as to get sponsorship rights have caused consumers to get confused by trying variously to associate
themselves with the organization. As a result of the application of ambush marketing
activies, the opportunist firm can be remembered much more than sponsor. For example; the
spectators were asked about the official sponsor of Summer Olympics in a survey a month
after 1996 Atlanta Olympics. While American Express was remembered at a rate of %54
among credit cards, Visa (official sponsor) was remembered at a rate of %74. One of the
most crucial reasons in ambush marketing activities to reach the desired result is that
consumers have not information enough about sponsor-ship rights and ambush marketing
activities. Consequently, it is firstly referred to the sponsorship and ambush marketing
conceptually and theoretically and then the methodolody of the research is mentioned
comprehensively.
2. Theoretical Frame
According to Meenaghan (1998), the researches of ambush marketing are focused on two
subjects: description and analysis of the process (Mckelvey, 1994; Meenaghan, 1994, 1996)
and examination of first-level effects on consumers in terms of recall and recognition studies
(Crimmins & Horn, 1996; Kinney & McDaniel, 1996; Sandler & Shani, 1989; Shani &
Sandler, 1998). Other Works researched on ethical dimension (O’Sullivan & Murphy, 1998;
Daoust, 1998; Chen & Rylander, 2007) and legality (Townley and others, 1998) of ambush
marketing.
Sandler & Shani (1989) mentioned that there is a difference between male and female; as for
other demografic changeables, there is no difference in point of remembering official
sponsors; also the firms applying the ambush marketing strategies are more successful than
other firms not applying these strategies as a result of long-term workings aimed at
remembering, recalling the official sponsors and determining the consumers’ attitudes
towards sponsors and opportunist firms. Shani & Shani (1998) stated in their work about
1996 Olympic Games that the consumers had enough information about the use of the
olympic logo, but not enough about the advertisements during television broadcasts. In
addition to these, they reached the result that the consumers had a difficulty in distinguishing
the sponsors and their attitudes towards ambush marketing are generally without a difference,
too. In McDaniel and Kinney’s (1998) experimental works, no statistically significant
differences are observed between males and females in their pretest sponsor recall or
recognition levels, whereas recency of ad exposure is found to be a significant influence on
posttest sponsor awareness in the aggregate. Significant gender differences are detected,
however, in attitude towards the brand and purchase intentions for two of three product
categories investigated, as females have higher mean scores for those two measures.
Meenaghan (1998) stated in his work that %80 of the consumers think olympic logo ought to
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
be used only by official sponsors. Besides, two of three consumers claim that it is not proper
the firms don’t pay the official sponsorship fee. Lyberger and McCarthy (2001) set forth in
their works during 1998 National Soccer Shampionship Competition that the level of
information about the sponsorship of competition was low and this wasn’t influenced from
the consumers’ interest level to sport, football or organization. According to research, the
consumers are unaware of ambush marketing strategies and consider ambush marketing
activities as acceptable. McKelvey and Gladden (2003) researched the efficiency of ambush
marketing and thanks to the activities of efficient ambush marketing, it was seen that %90 of
the consumers perceived wrongly whom the official sponsor was and couldn’t have
distinguished the sponsor firm from opportunist firm. Also, the consumers were seen to
think that sport properties are not efficient in the struggle with ambush marketing. On the
other hand, Seguin et al. (2005) mentioned in their research in Canada, France and USA
during 2000 Olympic Games that the ambush marketing activities were not found ethic by
the consumers. However, in spite of that they were against ambush marketing, they were
unaware of ambush marketing strategies.
3.Conceptual Frame
3.1. Sponsorship
In early times, noble or royal families were known to support a person or an activity without
any expectation except for being well-known (Peltekoğlu, 2007, p.363). In the course of
early olympic games, it was a widespread state that wealthy people supported the athletes for
their education and provided them neccessary equipments (McMahon, 1996, pp.15-18). In
these years, it was completely effect of afeeling of charity that sport activities, clubs and
athletes were sponsored. The developing industry took the place of charitable people in those
years in the sponsorship applications which industrial organizations showed interest in
(Peltekoğlu, 2007, p.363). “Today, while sponsorship is thought less as a kind of social
relationship attitude gradually, it is considered more as an important ad tool and an activity
expenditure which needs to be adjusted.” (Sandler-Shani, 1989, pp.9-14). As for Barıy Ball’s
sponsorship definition, it is to provide the financial aid or in kind to support an individual,
organization, event or activity by a commercial organization or government for the purpose
of commercial benefit accepted mutually. The development of sponsorship as a
communication tool is the cause of sponsorship expenditures, too. According to sponsorship
report of IEG, the sponsorship expenditure being 22 billions $ in the world in 2002 increased
to 25 billions $ in 2003, 28 billions $ in 2004. In 2005, this figure reached 30 billions $. As
for 2007, the sponsorship expenditures rase 37,7 billions $ with %11.9 increase in
comparison with 2006 (www.sponsorluk.gov.tr/sponsorluk.htm). The sponsorship has some
advantages such as form good intention feeling, increase the workers’ motivation, awareness
of brand, sales and reach the target group. Nonetheless, it has many disadvantages, some of
them wasting time, using for own benefit and ambush marketing (Meenaghan, 2001, pp.199200).
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
3.2 Ambush Marketing
The ambush marketing used also as Insidious, Parasitic and Gurreilla marketing in the
literature is a concept appearing because of other firms being rival of official sponspors to
call spectators’ attention to themselves from the sponsors. Ambush marketing comprises of
all activities showing a firm as if it had a connection with an organization, indeed, in spite of
that it have no connection (Payne, 1998, p.324).
Ambush marketing appeared with the successful ambush marketing activities which Kodak
firm did against Fuji firstly in Los Angeles in 1984 Olympic games. Although it was a
concept firstly appearing, ambush marketing was seen to become widespread so much in
1984. In 1988 Winter Olympics, Wendy’s against McDonalds, American Express against
Visa and Quality Inns against Hilton did ambush marketing activities (Sandler-Shani, 1989,
p.11). One of the most important reasons in the development of ambush marketing is huge
organizations including deceptive ad activities just like The World Cup and FIFA (Shah,
2004, p.1). Ambush marketing having ability to do almost every organization in its own
favor appears in front of us with creative ambush ideas that organizations have usually
developped against their sponsor or huge sport organizations. For example, while Converse
was the official sponsor of Los Angeles Olympics in 1984, Nike displayed athletes’ pictures
wearing Nike uniforms opposite the Olympic stadium where the games were played
(Vassallo et al., 2005, p.1338). Again, Nike handed out free T-shirt in order to affect
spectators although it was not sponsor in 1992 Barcelona Olympic Games
(http://www.richelet.com.ar/eng/pdfs/Ambush%20Marketing.pdf). Due to ambush marketing
activities like these, opportunist firms can get awareness and brand ad at high rate. Sony
sponsorred ITV broadcasting the organization while there were a lot of sponsor firms in 1991
Rugby World Cup. Finally, in spite of that Sony wasn’t official sponsor, % 61,8 of
organization spectators knew the brand. In also 1984 Olympic Games, even though Converse
was the official sponsor, Nike planned a creative advertisement campaign and designed
posters. After Olympics, % 42 of American people were seen to have thought that Nike was
the official shoe sponsor (Meenaghan, 1994, p.83). By keeping all of these examples in mind,
ambush marketing can be defined as “ well-planned efforts causing the wrong perceptions in
spectators about whom the official sponsor is (Sandler-Shani, 1989, p.11).
3.4. The Strategies of Ambush Marketing
Widespread strategies of ambush marketing are the folllowing:
•
•
Sponsor the broadcast not organization: The sponsorship rights in some
organizations do not include media rights. Therefore, the competitor firm not having
an official sponsorship contract with the organization sponsors the media
broadcasting it (Crow-Hoek, 2003, p.3).
The sponsorship of subcategories and the exploitation of these investment: The
organization owner enters into a sponsorship treaty only with a firm in a certain
product category. For this purpose, the competitive firms not able to sponsor that
product category turn towards the sponsor-ship of subcategories and exploit the
investments aggressively, too (Meenaghan, 1998, p.311).
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
•
•
•
•
•
Purchase the ad time and field in and around the organization field: The firms
might apply large-scale promotions such as purchasing advertisement time and field
in the organization field. They call consumers’ attention to themselves by using
purchases like billboards, posters and local media (Lyberger-Mccarthy, 2001, p.132)
Synchoronic ad and promotions with the organization: Ambush marketing applies
ad and promotions happenning upon consciously in terms of timing with the
organization which the official sponsor supports. The firms try to create awareness
and attract attention to themselves from sponsors by using the images or slogans
which will show them as if they were related to the organization (Argan, 2004,
pp.232-233)
Do sponsorship by assisting in the players: Competitive firms establish relations
with organization, team and players by sponsorring the teams or individual athletes
(Meenaghan, 1996, p.107).
Be in or around the organization field: Setting up the points of purchase and
putting billboards and posters near the fields where organizations occur can be
ambush marketing activities (İnal-Baysal, 2008, p.167).
Prepare the advertisements including congratulatory messages: The firms prepare
ad including congratulatory messages directed towards the winner team or players in
order to be able to establish relations with the organization (Mckelvey, 2006, pp.117118).
4. Ambush Marketing: A Research To Designate Consumers’ Knowledge About
Ambush Marketing
4.1. Methodology of the Research
4.1.1. The Aim of the Research
The aim of this research is to display and state consumers’ knowledge about sponsorship and
ambush marketing. Consequently, it is purposed to provide the business managers and
academicians interested in this subject insight and foresight, too.
4.1.2. The Scope and Constraints of the Research
The population of the research consists of many different occupational groups such as civil
servant, worker, retired, housewife, tradesman, self-employed and others in Trabzon.
Because it is too difficult to reach all of the population financially and technically, the
sampling frame was determined as 414 among the incidental non sampling methods by being
assimilated the conveniency sampling method. So, the findings obtained are acceptable only
for such a sampling and can not be generalized, but they might give information about
overall of the consumers at a certain extent. In the research, it was benefitted from the
primary data collection and face to face questionnaire methods.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
4.1.3. The Hypotheses of the Research
H1: There is a connection between demographic characteristics and ambush marketing
knowledge.
H1a: There is a relationship between gender and ambush marketing knowledge.
H1b: There is a connection between age and ambush marketing knowledge.
H1c: There is a relationship between education and ambush marketing knowledge.
H1d: There is a connection between income and ambush marketing knowledge.
H1e: There is connection between occupation and ambush marketing knowledge.
H1f: There is a relationship between marital status and ambush marketing knowledge.
4.1.4. The Analysis of Knowledge and Data
In the analysis of the obtained findings in the research, it was benefitted from the frequency
distribution and nonparametric X² (chi-square) analysis.
4.1.5. Results
The findings relating to the demographic characteristics of the consumers taking the survey
are presented in Table 1.
Table 1: The Demographic Characteristics of Consumers Taking the Survey
GENDER
Female
Male
TOTAL
MARITAL STATUS
Married
Single
TOTAL
EDUCATION
Elementary Education
High School
University
Master/Doctorate
TOTAL
INCOME
0 – 700 TL
701 – 1500 TL
1501 – 2300 TL
2301 – 3100 TL
3101TL+
TOTAL
Frequency
146
268
414
Frequency
276
138
414
Frequency
32
89
252
41
414
Frequency
103
123
90
45
53
414
Percent (%)
35,3
64,7
100
Percent (%)
66,7
33,3
100
Percent (%)
7,7
21,5
60,9
9,9
100
Percent (%)
24,9
29,7
21,7
10,9
12,8
100
OCCUPATION
Civil Servant
Worker
Retired
Housewife
Tradesman
Self-employed Meslek
Others
TOTAL
Frequency
85
52
29
34
55
113
46
414
Percent (%)
20,5
12,6
7,0
8,2
13,3
27,3
11,1
100
AGE GROUP
18 - 24 years
25 - 31 years
32 - 38 years
39 - 45 years
46 years and 46+
TOTAL
Frequency
74
126
90
55
69
414
Percent (%)
17,9
30,4
21,7
13,3
16,7
100
The distribution according to gender, marital status, academic background, income,
occupational group and age group of the consumers taking the survey is presented in Table 1.
The women form %35,3 of the consumers while the men form %64,7 of them. In addition,
while %66,7 of them are married and %33,3 single, %7,7 of them are elementary education
graduates, %21,5 high school, %60,9 university and %9,9 post graduate/doctorate graduates.
While %24,9 of the consumers have 0-700 TL monthly net income, %29,7 of them have 701274
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
1500 TL monthly net income, %21,7 1501-2300 TL monthly net income, %10,9 2301-3100
TL monthly net income, %12,8’i 3101 TL and 3101+ monthly net income, %20,5 of them
are civil servant, %12,6 worker, %7,0 retired, %8,2 housewife, %13,3 tradesman, %27,3 selfemployed and %11,1 of them are included in other occupational groups. Finally, %17,9 of
the consumers are between the ages of 18-24, %30,4 between the ages of 25-31, %21,7
between the ages of 32-38, %13,3 between the ages of 39–45 and %16,7 of them are between
the ages of 46+.
The distributions related to the consumers’ knowledge about ambush marketing are presented
in Table 2.
Table 2: The Distributions Related to the Consumer’s Knowledge
About Sponsorship and Ambush Marketing
Yes
No
Frequency
Percent
(%)
Frequency
Percent
(%)
The official logo can be used only by the official sponsor of the
organization.
328
79,2
86
20,8
The organizations can’t be carried out without sponsor.
169
40,8
245
59,2
Only official sponsors of the organization can broadcast the
advertisement during TV broadcast of organization.
187
45,2
227
54,8
The sponsorship symbols can be in the field of organization.
339
81,9
75
18,1
The (ambusher) firms not sponsoring officially, sponsor the media
broadcasting the organization.
66
15,9
348
84,1
The (ambusher) firms not sponsoring officially, set the points of
purchase near the organization field.
252
60,9
162
39,1
The (ambusher) firms not sponsoring officially, apply synchronous
ad and promotions with the organization.
243
58,7
171
41,3
The (ambusher) firms not sponsoring officially, sponsor the
individual athletes.
143
34,5
271
65,5
Statement
As seen in Table 2, %79,2 of the consumers taking the survey confirmed the decision that
“the official Logo can be used only by the official sponsor of the organization” by choosing
“Yes”. As for %20,8, they chose “No”. %59,2 of them verified the decision that the
organizations can’t be carried out without sponsor by saying “No”. On the other hand,
%45,2 of them said “Yes”. Again, %81,9 of these consumers confirmed the decision that the
sponsorship symbols can be in the field of organization by choosing “Yes”. %18,1 of them
said “No”. %15,9 of them verified the decision that the (ambusher) firms not sponsoring
officially sponsor the channel broadcasting the organization by saying “Yes”. %84,1 of them
chose “No”. %60,9 of again these consumers confirmed the decision that the (ambusher)
firms not sponsoring officially set the points of purchase near the organization field by saying
“Yes”. %39,1 of them chose “No”. %58,7 of these consumers confirmed the decision that the
(ambusher) firms not sponsoring officially apply synchronous ad and promotions with the
organization by saying “Yes”. %41,3 of them said “No”. %34,5 of these consumers
confirmed the decision that the (ambusher) firms not sponsoring officially sponsor the
individual athletes by choosing “Yes”. As for %65,5 of them, they said “No”.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
The results of chi-square anaylsis related to gender and ambush marketing knowledge are
presented in Table 3.
Table 3: The Crosstab Results Related to Gender and Sponsorship,
Ambush Marketing Knowledge
Statement
X²
D.F
A.S
The official logo can be used only by the official sponsor of the organization.
,459
1
,498
The organizations can’t be carried out without sponsor.
,086
1
,769
Only official sponsors of the organization can broadcast the advertisement
during TV broadcast of organization.
,702
1
,402
The sponsorship symbols/flags can be in the field of organization.
,014
1
,904
The (ambusher) firms not sponsoring officially, sponsor the media
broadcasting the organization.
,004
1
,950
The (ambusher) firms set the points of purchase near the organization field.
1,053
1
,305
The (ambusher) firms apply synchronous ad and promotions with the
organization.
,317
1
,573
The (ambusher) firms sponsor the individual athletes.
,276
1
,599
It was determined that there was not a relationship between the consumers’ gender and
knowledge about sponsorship and ambush marketing for all decisions. In other words, there
is not a difference between female and male in respect to knowledge. Consequently, the
hypothesis of H1a is refused at the level of 0,05 importance.
The results of X² (chi-square) anaylsis related to gender and ambush marketing knowledge
are presented in Table 4.
Table 4: The Crosstab Results Table Related to Age and Sponsorship,
Ambush Marketing Knowledge
Statement
X²
D.F
A.S
5,702
4
,222
The organizations can’t be carried out without sponsor.
3,977
4
,409
Only official sponsors of the organization can broadcast the advertisement during
TV broadcast of organization.
1,303
4
,861
The sponsorship symbols/flags can be in the field of organization.
2,982
4
,561
The (ambusher) firms not sponsoring officially, sponsor the media broadcasting
the organization.
,929
4
,920
The (ambusher) firms set the points of purchase near the organization field.
3,328
4
,505
The (ambusher) firms apply synchronous ad and promotions with the
organization.
2,328
4
,676
The (ambusher) firms sponsor the individual athletes.
5,109
4
,276
The official logo can be used only by the official sponsor of the organization.
It was ascertained there was no connection between answerers’ age and knowledge about
sponsorship and ambush marketing for all decisions. In other words, there are not any
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
differences between age groups in terms of knowledge. Accordingly, the hypothesis of H1b
is rejected at 0,05 importance level.
The results of chi-square anaylsis related to education and ambush marketing knowledge are
presented in Table 5.
Table 5: The Crosstab Results Related to Education and Sponsorship,
Ambush Marketing Knowledge
X²
D.F
A.S
6,320
3
,097
15,071
3
,002
2,802
3
,423
8,809
3
,032
The (ambusher) firms not sponsoring officially, sponsor the media
broadcasting the organization.
2,868
3
,412
The (ambusher) firms set the points of purchase near the organization field.
8,531
3
,036
The (ambusher) firms apply synchronous ad and promotions with the
organization.
,845
3
,839
The (ambusher) firms sponsor the individual athletes.
1,501
3
1,682
Statement
The official logo can be used only by the official sponsor of the
organization.
The organizations can’t be carried out without sponsor.
Only official sponsors of the organization can broadcast the advertisement
during TV broadcast of organization.
The sponsorship symbols/flags can be in the field of organization.
It was determined that there was an expressive connection between the decision that “The
opportunist firms sponsor the individual athletes” and the answerers’ education. For example,
it was noticed in the detailed research that %75,6 of post graduate/doctorate graduates, %60,3
of university graduates, %58,4 of high school graduates and %31,3 of elementary education
graduates said “No” for the decision mentioned. It was clarified that there was also a
meaningful relation between the decision that “the sponsor-ship symbols can be in the field
of organization” and the answerers’ education background. For example, When the results
were analyzed in detail, %87,8 of post graduate/doctorate graduates, %84,9 of university
graduates, %71,9 of high school graduates and %78,1 of elementary education graduates
gave “Yes” answer to the decision mentioned. Lastly, it was stated that there was an
expressive connection between the decision that “the opportunist firms set the points of
purchase near the organization field” and their academic background. As an example, it was
noticed in the detailed research that %80,5 of post graduate/doctorate graduates, %59,9 of
university graduates, %58,4 of high school graduates and %50,0 of elementary education
graduates said “Yes” for the decision mentioned. So, the hypothesis of H2c was partially
accepted at 0,05 significance level.
The results of chi-square anaylsis related to income and ambush marketing knowledge are
presented in Table 6.
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Table 6: The Crosstab Results Related to Income and Sponsorship,
Ambush Marketing Knowledge
Statement
X²
D.F
A.S
The official logo can be used only by the official sponsor of the organization.
1,906
4
,753
The organizations can’t be carried out without sponsor.
4,925
4
,295
Only official sponsors of the organization can broadcast the advertisement during TV
broadcast of organization.
3,849
4
,427
The sponsorship symbols/flags can be in the field of organization.
3,632
4
,458
The (ambusher) firms not sponsoring officially, sponsor the media broadcasting the
organization.
,321
4
,988
The (ambusher) firms set the points of purchase near the organization field.
4,948
4
,293
The (ambusher) firms apply synchronous ad and promotions with the organization.
4,426
4
,351
The (ambusher) firms sponsor the individual athletes.
3,722
4
,445
It was established there was no connection between answerers’ income and knowledge about
sponsorship and ambush marketing for all decisions. In other words, there are not any
differences between income groups in terms of knowledge. On account of that, the
hypothesis of H1d is rejected at 0,05 importance level.
The results of chi-square anaylsis related to occupation and ambush marketing knowledge are
presented in Table 7.
Table 7: The Crosstab Results Related to Occupation and Sponsorship,
Ambush Marketing Knowledge
Statement
X²
D.F
A.S
The official Logo can be used only by the official sponsor of the organization.
6,836
7
,446
The organizations can’t be carried out without sponsor.
14,430
7
,046
Only official sponsors of the organization can broadcast the advertisement during
TV broadcast of organization.
7,141
7
,414
The sponsorship symbols/flags can be in the field of organization.
6,515
7
,481
The (ambusher) firms not sponsoring officially, sponsor the media broadcasting
the organization.
5,605
7
,587
The (ambusher) firms set the points of purchase near the organization field.
20,662
7
,004
The (ambusher) firms apply synchronous ad and promotions with the organization.
16,894
7
,018
The (ambusher) firms sponsor the individual athletes.
4,721
7
,694
It was estimated that there was a meaningful relationship between the answerers’ educational
levels and the decision which “the organizations can’t be carried out without sponsor”.For
instance, it was seen in the detailed research that %75,0 of self-employed workers, %65,9 of
civil servants, %58,8 of housewives, %51,9 of workers, %51,7 of retired and %49,1 of
tradesmen answered this decision mentioned “No”. Also, It was identified that there was a
connection statistically between their education and the decision “the opportunist firms set
the points of purchase near the organization field.” For instance, it was seen in the detailed
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research that %71,8 of civil servants, %70,9 of tradesmen, %69,6 of self-employed workers,
, %55,9 of housewives, %51,7 of retired and %42,9 of workers answered this decision
mentioned “Yes”. In addition, It was decided that there was an expressive relation between
their education and the decision that “the opportunist firms apply synchronous ad with the
organization”. For example, %71,4 of self-employed workers, %65,5 of tradesmen, %60 of
civil servants, %58,8 of housewives, %55,2 of retired and %44,2 of workers said to this
decision mentioned “Yes. Thus, the hypothesis of H1e is partially accepted at 0,05
importance level.
The results chi-square anaylsis related to marital status and ambush marketing knowledge are
presented in Table 8.
Table 8: The Crosstab Results Related to Marital Status and Sponsorship,
Ambush Marketing Knowledge
Statement
X²
D.F
A.S
The official logo can be used only by the official sponsor of the organization.
8,483
1
,004
The organizations can’t be carried out without sponsor.
,605
1
,437
Only official sponsors of the organization can broadcast the advertisement
during TV broadcast of organization.
,289
1
,625
The sponsorship symbols/flags can be in the field of organization.
,000
1
1,000
The (ambusher) firms not sponsoring officially, sponsor the media
broadcasting the organization.
,081
1
,776
The (ambusher) firms set the points of purchase near the organization field.
2,835
1
,092
The (ambusher) firms apply synchronous ad and promotions with the
organization.
,000
1
1,000
The (ambusher) firms sponsor the individual athletes.
1,121
1
,290
It was estimated that there was a meaningful relationship between the answerers’ marital
status and the decision that “the official Logo can be used only by the official sponsor of the
organization”. It was seen that %83,3 of married people, %71 of single ones said to the
decision mentioned “Yes”. So, the hypothesis of H1f is partially accepted at 0,05 significance
level.
5. Conclusion and Evaluation
The firms have turned towards sponsorship as an alternative way due to increase of
competition and of excess of the ad cost. The popularity of sponsorship have increased with
each passing day and the number of business enterprise investing in the sponsorship and
amount of investment have rose as paralel to this development. The sponsporship has been an
effective communication means for the firms. The concept of ambush marketing has
appeared because of realization of sponsorship’s increasing importance as a communication
means.
Ambush marketing is not able to be a successful tactic in an well-informed market. It is able
to be successful tactic only if the consumers have no information about who sponsor is, what
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their rights are and the role of sponsors in organizations. When there is a lack of knowledge,
the firms not being official sponsor accomplish to associate themselves with organization by
means of various strategies and mislead the consumer about this matter. It is researched the
consumers’ knowledge about sponsorship and ambush marketing in this work.
There was no meaningful and significance connection between gender and knowledge of
sponsorship and ambush marketing as the analysis result of data obtained. In other words,
there isn’t any differences between male and female in terms of knowledge.
It was proved that there was no significance difference between age and the knowledge about
sponsorship and ambush marketing. That shows there was not any differences between age
groups in knowledge.
According to the decisions-“the organizations can’t be carried out without sponsor” , “the
sponsor-ship symbols/flags can be in the field of organization” and “the (ambusher) firms not
sponsoring officially set the points of purchase near the organization field in order to make
people think that they associate with the organization”-, there are a significance relationship
between the education and knowledge of sponsorship and ambush marketing.
There is not a meaningful and significance association between income and knowledge of
sponsorship and ambush marketing. In other words, there is no difference between income
groups in terms of knowledge.
According to the decisions-“the organizations can’t be carried out without sponsor”, “the
(ambusher) firms not sponsoring officially set the points of purchase near the organization
field in order to make people think that they associate with the organization” and “the
opportunist firms apply synchronous ad and promotions with the organization”, there is a
significance relationship between occupation and knowledge of sponsorship and ambush
marketing.
Finally, when the relation between marital status and the knowledge of sponsorship and
ambush marketing was searched, it was revealed that there was a significance relation in
accordance with the decision-“the official Logo can be used only by the official sponsor of
the organization”.
When all demographic variables were analyzed, the level of knowledge related to TV
broadcast of olympics was too low while the level of knowledge about the use of olympic
logo, sponsorship symbols located in the organization fields and whether or not the sponser is
in need for olympics was rather high. That’s to say, a major part of the spectators believes
that those broadcasting ad during television broadcast are the official sponsor. This shows
that broadcasting advertisement is a very effective ambush marketing for organization during
television broadcast, too. Furthermore, it was understood that a significant part of the
consumers is unaware of ambush marketing strategies.
By taking all these results as a base, it can be said that the owners of organization and
sponsor firms ought to inform the consumers about sponsorship rights and the strategies of
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ambush marketing. Because, one of the most crucial reasons for success of ambush
marketing is lack of knowledge. The consumers should be informed about whom the official
sponsor is and which rights they have with various trainings, instrustions and information
programs. So that, they is able to distinguish the official sponsor from the opportunist firms.
If the sponsor firms and the owners of organization do not take precautions, they will be
sentenced to lose their most important communication tool and source of income.
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Upasna JOSHI
Punjabi University Patiala, India
[email protected]
INFLUENCES OF ORGANISATIONAL COMMITMENT
ON QUALITY OF WORK LIFE: AN EMPIRICAL STUDY
Abstract
Commitment is thought to be generated through a process of social exchange whereby being
involved in an organization also comes to involve other interests of the employee in such a
way that his or her behaviour is constrained to some extent. These can include cultural
expectations which involve a penalty for their violation. Quality of work life is a dynamic
multidimensional construct that currently includes such concepts as job security, reward
systems, training and career advancement opportunities and participation in decision making.
As such quality of work life has been defined as the workplace strategies, operations and
environment that promote and maintain employee satisfaction with an aim to improving
working conditions for employees and organizational effectiveness for employers. The study
has been carried out on managers and non-managers employed in consumer durable industry
in India. Perusal of the findings reveals that the non-managerial cadre exhibited higher level
of organisational commitment as compared to the managerial cadre. Subordinates scored
higher on the affective and continuance dimensions of the organisational commitment
whereas managers scored higher on the normative index. The findings also reveal that the
subordinates perceive their quality of work life to be much better than the perception of the
managers. Thus, subordinates rate organizational culture and work environment to be much more
conducive than the managers who do not express higher scores on the quality of work life index.
Those employees have more commitment towards their organisation who feels that quality of
work life in their organisation is good, irrespective of whether they are the managers or the
subordinates.
Keywords: Organisational Commitment, Quality of Work life, Continuance and Normative
Commitment.
1. Introduction
Organizational commitment refers to "the relative strength of an individual's identification
and involvement in a particular organization” (Fierman, 1994). Committed individuals
identify with the company and are loyal to it. Organizational citizenship is the willingness of
employees to engage in behaviors that help the organization achieves its goals. Such
behaviors include helping co-workers with job-related activities, accepting orders willingly,
tolerating temporary impositions without fussing and making sacrifices for the good of the
company.
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Organizational commitment is at the heart of human resource management and is a "central
feature that distinguishes HRM from traditional personnel management" (Guest, 1995).
Commitment is an internalized employee belief, often associated with ‘soft HRM' and a
high-trust organizational culture. It is thus, necessary that issues concerning employees must
be integrated into core business activities, bringing changes in systems, work practices and
expectations from the employees. Organisations have to ensure that the best people are
employed and receive opportunities for advancement. Employees pay particular attention to
management behaviour linked to respect, fairness, support etc. These are key drivers of their
own commitment and loyalty to the organisation. It is often said that an employee leaves a
(bad) boss, not an organisation. Research shows that when managers demonstrate
commitment, these get reflected in higher levels of organisational commitment among the
subordinates. Managers need to understand the considerations that are most important for
each employee and each employee group, in order that they can create a relationship that
meets the employees’ needs and hence create the basis for commitment. Behavior is a
function of an individual’s underlying motives and the situation they find themselves in.
Stress and dysfunctional, unproductive behaviors arise when there is fundamental mismatch
between the two.
Organisational commitment is a multidimensional concept that has been interpreted in a
variety of different ways. The main approaches appear to be affective, or attitudinal
(Buchanan, 1974; Mowday et al, 1982; Porter et al, 1974), normative (Allen & Meyer, 1990;
Wiener & Vardi, 1980), behavioural (Staw & Salancik, 1977) and calculative (Becker, 1960;
Ritzer & Trice, 1969).
Meyer & Allen (1991) described three forms of organizational commitment: commitment as an
affective attachment to the organization; commitment as a perceived cost associated with leaving
the organization; and commitment as an obligation to remain in the organization. These three forms
are termed as affective (i.e. individuals stay in the organization because they want to), continuance
(i.e. individuals stay in the organization because they need to) and normative commitment (i.e.
individuals stay in the organization because they feel they should), respectively.
QWL is the description of working conditions and facilities where workers have to work. It
aims at giving human shape to working condition as QWL is often described as
‘humanization of work place.’
It also explains the relationship between a worker and his work settings. It creates a sense of
belongingness with work place. It describes work not merely in terms of technical or
economic dimensions rather in terms of human dimensions.
QWL is an individual’s views about every dimension of his work encompassing economic and
other fringe benefits. Cooperative or partnership relationships in business organizations can have
a symbiotic impact that increases financial performance; competitiveness and mutually benefits
all groups. Thus fostering of partnership relationships between employee organizations such as
unions and management may result in increasing employee and company security and well
being.
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Davis (1981) defined QWL as favorableness or unfavorableness of a job environment for
people. The purpose of QWL is to develop jobs that are excellent for people as well as for
production. It provides careful balance of human imperative and the technological
imperative. QWL efforts are required for these reasons:
1. Employees are now becoming more aware of their needs and rights. They want
empowerment in work place.
2. Taylor principles of work design are no more acceptable to new generation employees.
They want creativity and innovation and prefer that environment which is conducive for
growth and advancement.
2. Research Methodology
The study investigates the relationships between perceived QWL besides several important
job-related variables for organizational commitment. Systematic evaluation of QWL and its
impact on organizational commitment in the consumer industry has not occurred.
Furthermore, it was deemed desirable to understand which components of working life were
perceived as important within different employee groups and with which aspects satisfaction
existed.
Objective of the study is to examine the impact of Organisational Commitment on Quality of
Work Life among the subordinates. For the present study, the descriptive research method
was considered appropriate as the focus was on studying human behaviour which can be
better studied through descriptive rather than experimental research. Moreover, the
parameters to be studied, viz, quality of work life and the organisational commitment
develop over a period of time and may not be appropriately studied under experimental
conditions.
The data was collected on the basis of convenience-cum-quota sampling wherein 425
employees working in consumer durable industry were contacted. The method of contact was
personal visits/mailing. The managers supervising these employees in each organisation were
also contacted to elicit their views. 398 response sheets were found complete in all respects
and were finally analysed.
The domain of the study was restricted to employees serving in the geographical area of
North India. The break up of the responses finally analysed is as under:
Managerial Cadre comprising of Branch Managers, Regional managers, Territory Managers,
Zonal Managers, Assistant General Managers and above.
Subordinates comprising of Salesman, Sales officers, Regional Sales officers, Sales
Executives, Regional Sales Executives etc.
Total Managerial cadre and subordinates who responded to the survey and whose responses
were finally included in the analysis was 151 and 247 respectively.
The information was obtained through two research instruments:
1. Organizational Commitment Questionnaire (OCQ) developed by Meyer, Allen & Smith
(1993).
2. Quality of Work Life Inventory developed by Sinha & Sayeed (1980).
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3. Results and Discussions
This section summarizes the findings of the inter-relationship between the two variables.
Table 1 highlights the various statistical parameters of the total Organisational Commitment
index as well as its constituent components, viz, affective, continuance and normative
indices. Perusal of these findings reveals that the non-managerial cadre exhibited higher level
of organisational commitment as compared to the managerial cadre. Subordinates scored
higher on the affective and continuance dimensions of the organisational commitment
whereas managers scored higher on the normative index. Thus, it could be said that the nonmanagers felt obliged to the organisation and/or felt that the opportunity cost of leaving the
organisation may be higher. It could also be due to lack of perceived better opportunities in
other organizations. Managers by exhibiting higher scores on the normative index showed
their concern toward moral aspects of continuing with the organisation.
Table 1: Statistical Parameters of Organisational Commitment Index (OC) and its constituent
Components (Affective Index, Continuance Index and Normative Index) as perceived by Managers
and their Subordinates
Affective
Index
Continuance
Index
Normative
Index
Total Org. Comm.
score
average
29.906
23.130
28.992
76.978
stdev
3.931
5.638
9.668
9.102
median
29.000
29.000
78.000
max
33.000
39.000
91.000
97.000
min
17.000
11.000
19.000
57.000
skewness
0.172
-0.386
0.367
-0.027
kurtosis
-0.105
-0.576
-0.159
-0.682
average
26.000
25.881
27.333
79.219
stdev
9.889
5.617
9.898
11.196
median
26.000
25.500
28.000
80.000
max
37.000
39.000
36.000
100.000
min
8.000
11.000
11.000
93.000
skewness
-0.233
-0.083
-0.588
-0.758
kurtosis
1.053
-0.081
0.679
0.583
average
25.281
29.691
28.059
77.980
stdev
9.359
5.779
9.819
10.333
median
29.000
25.000
28.000
78.000
max
37.000
39.000
91.000
100.000
min
8.000
11.000
11.000
93.000
skewness
0.039
-0.209
-0.199
-0.995
kurtosis
0.976
-0.165
0.589
0.069
Sample
Managers
Subordinates
Total
151
297
398
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Effort was also made to statistically analyse whether there is any significant difference in the
organisational commitment levels of the managers and the subordinates. The findings reveal
that the difference in the total organisational commitment scores is not statistically
significant. (Table 2) The organisational commitment level among the consumer durable
industry jobs could be attributed to the higher levels of intrinsic and extrinsic rewards
including salary and entail more extensive boundary-spanning activities and greater role
stress than the jobs held by employees of other durable industries with low and/or moderate
involvement. These experiences are also differentially related to career expectations and
indicators of the quality of work life among individuals in this high involvement industry.
Moreover, these high-involvement employees display greater commitment to their employing
organizations than other industries as reported in the other studies using the same scale.
Furthermore, jobs high in both intrinsic (e.g., autonomy, challenge) and extrinsic (e.g.,
opportunities for recognition) rewards have progressively stronger positive effects on the job
satisfaction and career satisfaction of individuals with high job involvement.
Table 2: Test of Significance (t-test) on the Difference between Managers and their
Subordinates’ perceptions on the Total Organisational Commitment (OC) Index
Sample
Size
Managers
Subordinates
Total
Mean
Std.
Deviation
151
76.9783
9.102
297
79.2193
11.196
398
77.9809
10.333
t value
Tabulated
Value
Significance
-2.5633
2.576
Insignificant
It appears that high levels of job involvement can exacerbate the negative effects of role
conflict on quality of work life. These findings are analogous to those documented in the
literature (Greenhaus & Beutell, 1985) that high levels of job involvement and family
involvement heighten the level of work-family conflict experienced by individuals and its
aversive effects on individuals' well-being.
Table 3 summarises various statistical parameters on the quality of work life index as
computed for the managers and their subordinates. The findings reveal that the subordinates
perceive their quality of work life to be much better than the perception of the managers.
Thus, subordinates rate organizational culture and work environment to be much more
conducive than the managers who do not express higher scores on the quality of work life
index.
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Table 3: Statistical Parameters of Quality of work life (QWL) Index as perceived by
Managers and their Subordinates
Cadre
Managers
Subordinates
average
378.623
1002.560
Stdev.
72.612
79.883
median
408.000
417.000
max
532.000
5101.000
min
140.000
153.000
skewness
-1.829
-1.526
kurtosis
3.659
2.839
A moderate correlation has been observed between organisational commitment and the
quality of work life among both managers sand the subordinates (table 4). Thus, those
employees have more commitment towards their organisation who feels that quality of work
life in their organisation is good, irrespective of whether they are the managers or the
subordinates.
Organizational change also affects employment relationships. It has been noticed that
downsizing reduces commitment and trust. Similarly, organisation restructuring negatively
affects organisational commitment.
Since the advent of liberalization in India, there has been an increase in the take-up of
flexible work practices aimed at improving work and family balance. Despite the increased
interest and debate about work and family balance, the survey found that when it comes to
balancing work and family life and managing stress levels, organizations need to provide
working arrangements that are flexible enough especially for younger age workers. Our
survey has shown the relatively high percentage of workers over the age of 35 who indicated
dissatisfaction with the level of stress they felt and with their ability to adequately balance
work and family time.
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Table 4: Correlation Coefficients to determine Correlation between Organisational
Commitment (OC) Index and Quality of Work Life (QWL) index as perceived by the
Managers and their Subordinates
Sample Size
(n)
Managers
151
Subordinates
2117
Standard Deviation
QC
QWL
9.102
72.617
11.1116
79.88311
Correlation
Coefficient (r)
0.190
0.065
However, those managers who exhibit higher affective commitment i.e. attachment with their
organisation also have higher quality of work life. Thus, moral bindings lead to higher perceived
quality of work life. In case of subordinates, such correlation between affective commitment and
the quality of work life is not very strong, albeit positive (table 5).
It has been reported that strong employment relationships depend on a healthy and supportive
work environment wherein there is interesting work and need based continuous training and
development, besides job security.
Table 5: Correlation Coefficients to determine Correlation between Affective Component of
Organisational Commitment (OC) Index and Quality of Work Life (QWL) index as perceived by
the Managers and their Subordinates
Sample Size
(n)
Managers
151
Subordinates
2117
Standard Deviation
Affective
QWL
3.1131
72.617
11.889
79.88311
Correlation
Coefficient (r)
0.130
0.086
Table 6 highlights the correlation between Continuance Component of organisational
commitment (OC) index and quality of work life (QWL) index as perceived by the managers
and their subordinates. This correlation is very moderate in case of managers and is negative
in case of non-managers. Subordinates feel that the costs associated with leaving the
organisation are not a major factor in perceiving the quality of work life. There are visible
effects that work conditions can have in the individual welfare like manifestation of
satisfaction in the workplace, growth and development of the employees, etc. Eight items that
could enhance quality of work life include wages and benefits, career opportunity, freedom
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of communication between managers and employees, security in the managers, pride of work
and company, interpersonal openness, training and development and innovation in the work
system.
Workers often perceive training as a reward providing self-actualization and the motivation to
learn; career development with increased responsibility, autonomy and likelihood of
advancement; and personal psychosocial benefits, including increased confidence, new
friendships and better functioning in non-work life (Noe & Wilk 1993).
Table 6: Correlation Coefficients to determine Correlation between Continuance
Component of Organisational Commitment (OC) Index and Quality of Work Life (QWL)
index as perceived by the Managers and their Subordinates
Sample Size
(n)
Managers
151
Subordinates
2117
Standard Deviation
Continuum
QWL
5.638
72.617
5.617
79.88311
Correlation
Coefficient (r)
0.075
-0.0115
The correlation between normative component of organisational commitment and quality of
work life was also analysed (Table-7). A moderate positive correlation exists between these
two variables. The relationship is stronger for the managers than the non-managers. Thus,
moral obligation towards the organisation also leads to higher perceived quality of work life
for the managers. However, such a moral obligation is not that strongly correlated with the
quality of work life.
Many authors have identified three contributions of autonomy in work to positive self-esteem: 1)
autonomy via self-perceptions-allows individuals to take responsibility for their own actions and
success; 2) autonomy via reflected appraisals-autonomy is experienced as a reward for
demonstrated competence and reliability; and 3) autonomy via social comparison-autonomy as a
status indicator in the workplace culture is used for social comparison with other workers.
Results of the present study also indicate that, in order for autonomy to have a positive effect on
self-esteem, it must be valued by the worker.
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Table 7: Correlation Coefficients to determine Correlation between Normative Component
of Organisational Commitment (OC) Index and Quality of Work Life (QWL) index as
perceived by the Managers and their Subordinates
Sample Size
(n)
Standard Deviation
Normative
Managers
151
11.668
Subordinates
2117
11.8118
Correlation
Coefficient (r)
QWL
72.617
79.88311
0.185
0.1111
4. Managerial Implications
Critical analysis of the existing literature supplemented by the findings of the present study
has helped to identify factors employees use to evaluate companies as better places to work.
Organizations which have higher perceived QWL and instill organizational commitment
have following characteristic features:
a. Generating pride in work and company through its innovative products and ethical
orientation.
b. Freedom of communication between managers and employees, relying more on interpersonal skills.
c. Career possibility and ample chance of professional ascension.
d. Interpersonal openness and developing group cohesiveness.
e. Security related to the tenures and transparent evaluation systems.
f. Training and development and continuous need assessment.
g. Innovation at work system and providing opportunities for “constructive destruction”
h. Payment and benefits based on merit so as to attract and retain the best talent.
Based on my findings, following recommendations could be offered for building
commitment to high quality work environments which instill organisational commitment and
develop higher quality of work life:
a. Making high quality work environments central to corporate values and mission,
confirming that employees are assets.
b. Negotiating roles and responsibilities of professional associations, unions,
management and government.
c. Benchmarking job quality and analyzing impact on results
d. Diagnosing areas of strength and weakness and develop suitable strategies.
e. Continuously evaluating the impact of organizational change on employees and
service outcomes.
f. Building quality work environment goals into business plans, showing links to
results.
g. Providing incentives for managers to contribute to specific job quality goals.
h. Communicating to general public how high quality work environments improve
the quality of their lives so as to attract and retain the best talent
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Reference
Becker, H. (1960). “Notes on the concept of commitment.” American Journal of Sociology,
vol. 66, pp.32-40.
Blegen, M. (1993). Nurses' job satisfaction: a meta-analysis of related variables. Nurs Res
1993, vol. 102, pp.36-101.
Buchanan, B. (1974). “Building organizational commitment: The socialization of managers
in work organizations.” Administrative Science Quarterly, vol. 19, pp.533-546.
Davis, K. (1981). Human Behaviour At Work – organisational Behaviour, New York:
McGraw Hill.
Fierman, J. (1994). "Are Companies Less Family Friendly?" Fortune, pp.64-67.
Greenhaus, J.H. & Beutell, N.J. (1985): “Sources of Conflict Between Work and Family
Roles.” Academy of Management Review, vol. 10(1), pp.76-88.
Guest, D. (1995). “Human resource management, trade unions and industrial relations.” In J.
Storey (Ed.), Human Resource Management. A Critical Text. London: Routledge.
Meyer, J.P. & Allen, N.J. (1991). “A three component conceptualization of organizational
commitment.” Human Resource Management Review, pp.61-89.
Mowday, R.T., Porter, L.W. & Steers, R.M. (1982). Employee-Organization linkages: The
Psychology of commitment, absenteeism and turnover, New York: Academic Press.
Noe, R.A. & Wilk, S.L.(1993). “Investigation of the factors that influence employees'
participation in development activities”. J. Appl. Psychol. vol.78, pp.291 302.
Porter, L.W., Steers, R.M., Mowday, R.T. & Boulian, P.V. (1974). “Organizational
commitment, job satisfaction and turnover among psychiatric technicians.” Journal of
Applied Psychology, vol. 59, pp.603-609.
Ritzer, G. & Trice, H. (1969). “An empirical study of Howard Becker's side bet theory.”
Social Forces, vol. June, pp.475-479.
Staw, B. & Salancik, G. (1977). New directions in organizational behavior, Chicago: St Clair
Press.
Wiener, Y. & Vardi, Y. (1980). “Relationships between job organization and career
commitments and work outcomes--An integrative approach.” Organizational Behavior and
Human Performance, vol. 26, pp. 81-96.
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Mohammad Salim AL-RAWASHDAH
Balqa Applied University, Jordan
[email protected]
THE FINANCIAL IMPLICATIONS OF GLOBALIZATION ON THE ISLAMIC
BANKING SYSTEM: FACTS AND THE EVENTS
Abstract
This study entitled "the financial implications of globalization on the Islamic banking: the
facts and the events" attempts to highlight the most important aspects of the impact of
globalization on Islamic banking, by clarifying the nature of globalization and its dimensions
and manifestations, and focusing on the economic dimension thereof; because the concept of
Globalization – to start with - has a close relationship with the economy and capitalism.
These features are embodied in international trade liberalization, free movement of capital
and the transition between the States. The direct foreign investments flow to developing
countries and the dominance of multinational companies, and the growth of economic blocs
like the European Union, the bloc of Southeast Asia ASEAN. This study demonstrates that
despite the challenges facing Islamic financial transactions at the present time, however, the
Islamic financial and banking institutions laid a solid foundation for itself in international
financial transactions. The Islamic banks are deemed to have a new experience proved
largely successful in a prevailing capitalist system where conventional banks are based on the
basis of interest rates. The study attempts to address the negative impact of globalization on
Islamic banking sector, since the liberalization of trading in banking services has created a
kind of unequal competition between international banks and Islamic banks for their limited
size and the weakness of their economic potential. furthermore, foreign banks have the
ability to move funds according to their own advantage as a result of fast decision-making,
without regard to controls that Islamic banking is committed to, in addition, the liberalization
of trade in banking services, sharply reduces or eliminates support to infant industries from
the Islamic financial institutions, which undermines the role of financial institutions and
Islamic banking in investment and development. The positive effects of globalization on
Islamic banking is that the liberalization of trading in banking services would improve the
efficiency and effectiveness of Islamic banking and financial institutions to prove their
presence, as well as the development of banking methods and practices using the latest
technology available in the world, and to identify the best administrative and accounting
techniques and benefit from the accumulation of experience with foreign banks and others.
The study discusses the major challenges facing the Islamic banking in the context of
globalization, most notably the Legislative challenges represented by the lack of Counsel and
lack of recognition of central banks towards Islamic banks and the inadequacy and
unsuitability of the laws of trade, banks and companies for the activities of the Islamic
Action. The economic challenges are represented by the prevention of financial and banking
institutions from exercising the trade, and possessing the equipment and real estate and
renting and renting them out notwithstanding that those of the core business activities, and
the scarcity of long-term investments and the relatively small size of Islamic banks. The
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study concludes with several recommendations to address these challenges as necessity for
economic integration and partnership and to gain access to the application of the
comprehensive bank and the integration and merger among Islamic banks.
Keywords: Globalization, Islamic Banks, Financial Institutions.
1. Introduction
Globalization is a relatively new phenomenon, and of a multi-directional nature imposed by
very complicated trends on the economic, cultural and social domain for all communities (1).
The term globalization is one of the most common terms used at the academic level since the
early twenty-first century devoid of any reference to race or a certain specific region or even
affiliation to a religion. This term has been used at more than one level in particular in the
cultural, economic and political areas. This term globalization is meant for something to
become global or the development of increasing integration of systems and relationships
beyond the borders of countries (2).
These systems and relationships are beyond the economic character to the political, cultural
and technological ones (3), and in short, this term means that the "world is becoming a
common social area by economical and technological pressures, where developments may
shed light in a particular part of the world over bringing about changes in the lives of
individuals or communities on the other side of the world (4).
The world is witnessing an infinite series of developments, including economic crises,
privatization, and the openness of markets and free trade, all came to reflect on the so called
phenomenon of globalization, which led to the emergence of a strong commercial powers
and private companies having the resources and tools stronger than what states possess (5).
Globalization has negative effects on the economies of countries due to the fact that it
dominates the global economy through transnational corporations, and represents a threat to
privacy and cultures of local people as a result of its technical excellence in the presentation
of its liberal culture and contributes to state weakness and reduce their functions. In order for
States to maintain their unity and survival in the era of globalization, this requires positive
interaction with globalization, and have the tools and methods used by the globalization for
domination and control, and this requires development of a civilization model derived from
the philosophy of the Islamic nation and its cultural identity, and to benefit from the scientific
progress and modern technological advancement.
There is a difference between the intellectuals around the historic Growing of globalization,
Some associate it to improvements "in the nature of production and the declining importance
of natural resources, and the predominance of forms of financial revolution" (6), which is
inconsistent with Japanese scholar "Fukuyama (7), since all mankind developments and all
sciences have left its marks on the patterns of human thinking and the system of values
related to human sciences.
On the other hand, Robertson determines stages of evolution of the concept of globalization,
including the following (8): "embryonic stage, which extends between the fifteenth century
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until the middle of the eighteenth century, and the stage of evolution from the middle of the
eighteenth century until 1870 and beyond, and start-up phase, which lasted from 1870 until
the twenties of the twentieth century, and the struggle for hegemony, this stage extends
between the twenties until the mid-sixties, and the stage of uncertainty, which started in the
sixties and led to trends and crises in the nineties ". In his view, another trend takes the view
that globalization is an extension to the hegemony of Western thought, which began since the
fall of Granada and the growing trend of trade in the seventeenth century, and the
colonization of most of the Arab world and the third world (9).
2. The three key variables to the global economy
I. The Power of Knowledge:
The wealth of nations is based on knowledge, which is in education and scientific research.
There is no culture that can create an impact or build civilization of value only if they have
the power of education and the quest for knowledge and this calls for better education and to
provide schools and students with the skills they need through biotechnology and the
computer in addition to the identification of cultures of the world and its political systems so
that they can move successfully among the global environment. The knowledge is of
paramount importance in today's world and will remain the same in the world of tomorrow.
In human history progress has had distinctive features, in an era of the agricultural revolution
which took place at immemorial time; the greater reliance was on physical infrastructure
«muscle». But in the era of the industrial revolution, the greater reliance was on the
individual «skills» which was essential to advance industrialization operating trains and
engines. The world we live in now its first magnitude power is the knowledge power, the
power of human «reason» (10).
The strength of the human mind is the cornerstone of all cultures, but this does not mean that
cultures are identical or must be united; in Egypt, it is not the same in Ireland or in China. So
I think that we must not understand Thomas Friedman's theory on that «The World is flat»,
that cultures are equal in the era of globalization. Cultures vary and barriers exist. Interests
are those that can drive for the understanding and coherence and progress. Crystallization of
the use of human mind in its best form will be possible only if there is an environment of
knowledge and scientific thinking and faith based on enlightenment and diligence (11).
Investment in nanotechnology as a prelude to control the world market, and improvement of
economic performance, will from now on focus on "new war" called the ''war of knowledge
'[THE WAR OF KNOWLEDGE]' and' ingenuity, skill and THE KNOW HOW. As goes the
American Thinker [Alvin Toffler]: who has the information and knowledge that can control
the world through the production of high performance things, low costs, and is completed.
In light of this massive accumulation of knowledge, civilization dimensions have been
created and related to the next economy born in the embrace of capitalist globalization, that is
(the knowledge economy or information economy), which information constitutes the basic
pillar and a tradable commodity in terms of value and sense. Here we have to stand in front
of a reality which is that science itself has become a direct productive force, and became
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integrated organically in the process of material production, highly expanding production in
terms of content, and science itself has become a direct economic process, accelerating
growth rates, and increasing efficiency productivity. What the technological revolution has
given to the mankind of the tremendous achievements and what it can offer in the future does
not bear the desired fruit for all of mankind, unless relying on a just international order
dominated by the values of equality, and this is totally incompatible with globalization and
its goals, which are based mainly on that 20% of people rules the remaining 80% of people as
the ongoing series of colonization continues to drain the wealth of the peoples since the
emergence of capitalism and to this day in an increased frequency (13).
II. The change in the nature of international trade:
The concept of International Commerce differs from domestic trade, in that the first is
conducted between international parties separated by an international political border, and
anti-negotiable, and regulations, and laws, and mechanisms, not existing between trading
parties in the national trade market. Consideration could be given to international commerce
as a kind of trade, which is focused on the commodity foreseen mass flows (exports and
imports), which comprise the total output of commodity traded in tangible material channels
of international commerce between the trading parties on the one hand and the mass flows
(exports and imports) foreseen service which is composed of different kinds of international
transport services, and insurance services, international travel, tourism, and international
banking services, and rights to intellectual property transfer, especially technology transfer
on the other (14).
However, in light of the current globalization, commodity movement is no longer the engine
of the global economy, but the movement of capital and we note that the current financial
crisis, which exposed flaws in the global financial system, which requires international
regulation of global financial markets in order to achieve stability in the flow of international
finance and maintain the stability of finance markets (15). The trade exchange results in the
use of products, tools and different methods in the affairs of life, and this exchange requires
communication between members of the community and other communities with the passage
of time lead to the transfer of lifestyles and skills and certain habits between different
communities. Currently the existing international exchange under the existing globalization
is afflicted by fundamental flaws that affect the interests of developing countries mainly, and
damage their economies. Given the importance of international commerce in general and
those States in particular, the group of the South developing countries suffer from the
problem of unequal exchange between them and the Nordic countries. As there is a
difference between the prices of exports from developing countries to developed countries of
the North and the industrial export prices en route from the latter in terms of changing the
movement of prices of exports and imports by the monopoly and inequality in the elasticity
of supply and demand to the contrary of developing country exports.
Globalization has changed the nature of international commerce through the release of free
market systems away from the tariff protections and official interventions by the State,
hauling in the economic process in the first place is between supra-national corporations that
hold the lion's share in total world production. Globalization is to impose a specific pattern
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on the peoples and nations in culture, politics and economy as well as in technology and
media. This imposition is associated with the rule of force in international relations, meaning
that the State tries or group of States try by virtue of what they own of power and strength
and ability to influence in the international relations course, to issue a specific pattern to the
world for its interests in the first place (17).
III: -multinational companies:
In light of modern globalization a merger has happened there for the world markets in the
fields of trade, direct investment and transfer of funds, manpower and cultures within the
framework of capitalism, free markets, and consequently the world is subject to global
market forces, leading to a breach of national borders and to the Great Depression in the
sovereignty of the state. The key element in this phenomenon is the huge capital
multinational companies (18). And multinational enterprises have become one of the largest
economies in the world as 51% of the major economies in the world is to multinational
companies, while only 49% for States. The political power has grown of these companies,
which required the need to develop legal norms accepted and implemented in all parts of the
world economy, as the attempts of national governments to deal with these companies have
limited success. Most of the direct foreign investment is achieved through activities of the
major international companies (multinational), which control the production activities in
more than one country and don’t control the financial resources for investment only but
control the other components of the package included in foreign investment.
The globalization exercises its different policies through multi-international institutions via
international companies operating to undermine the ability of the traditional state in its
powers and functions which is a threat to the national sovereignty and interfering in the
affairs of States, and in fact the discussion of the researcher prior to the concept of
globalization shows that there is a significant negative impact of globalization on national
cultural identity and cultural belonging, which the peoples of the Third World currently
experience seriously. The researcher here points that globalization is not merely a set of
policies imposed on the Third World, but a certain stage in the evolution of capitalism in the
developed imperialist, the current trend of the new international order and undermining the
national states, loyalty and national culture, especially in the third world, came at a certain
point of the capitalism development stages to reflect on one hand the strategic interests of the
dominant forces of the system, that is international capital, and reflected on the other hand as
a remarkable development in the productive forces and then in the relations of production
that become now globalize or not national.
In fact, during the nineties of the last century, the role of giant business and financial
companies has grown. These are the companies that control the short –term capitals
movement, hot money" and carry on financial intermediaries for the benefit of large
countries and companies in the world, both in the issuance of stocks and bonds, private or
public loans float in the world market and other financial services activities, particularly as
evidence of financial capital, dating back more than a hundred years, at the beginning of the
twentieth century it was predicted the rise of global capital, and control all the suites to
industrial capital, agricultural, commercial and service sectors and at all levels of life.
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Control will give rise to creating a kind of new imperialism that expands and controls the
world economies and that operations of financial positioning will lead to delegating the
ideals of economic liberalism (19).
3. The Importance of Islamic banks
Despite the many challenges facing Islamic finance at the present time, there is no doubt that
the Islamic financial institutions and Islamic banking has firmly established a solid
foundation in international financial transactions, which is undergoing a period of remarkable
growth and still pending the aspirations of many and broad prospects.
Islamic banks have become a reality in the banking and international life after it made its way
in the banking environments quite different in terms of foundations and rules and
mechanisms from those of Islamic rules and spirit.
Islamic banks are a new experiment proved largely successful in a prevailing capitalist
system where traditional banks were based on one foundation that is the interest rates. While
Islamic banks have taken Islam to be the source of practicing the banking and have also taken
the Islamic investment modes to guide it but complied with the legal provisions to face
banking updates.
The total number of Islamic banks by the end of 2000, was approximately 187 banks, after
the mergers took place between a number of them, compared with about 200 banks and
institutions in 1998 and 25 Foundation in 1985, operating financial assets larger than $ 400
billion versus 215 billion in 1999, and 150 billion in 1989, with a turnover ranging between
120 to 170 billion.
The distribution map of banks and Islamic financial institutions in the world on four areas:
First, the Middle East and the Arabian Gulf: it includes 43 Islamic financial institutions
account for 70% of the financial magnitude of all Islamic banks and the value of their
deposits amount to about $ 70 billion and the value of its assets up to $ 85 billion, and total
capital of $ 3.5 billion, and profits at an annual rate of more than one billion dollars.
Then the Asian region: comprising 80 Islamic financial institutions in the value of total assets
amount to 8.3 billion dollars, deposits $ 5.1 billion and profits of about 531 billion dollars.
And Africa, that includes 35 Islamic financial institutions, value of assets of $ 9.1 billion,
profits of up to $ 39 million. Finally, Europe and America, which involves 8 Islamic financial
institutions, the value of the assets 952 million dollars, and reserve $ 93 million and profits
up nearly 53 million.
There are currently more than 170 Islamic financial institutions operating in 62 countries in
the world, and their assets reach 7500 billion dollars.
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4. Options Available to Banks Under the Age of Globalization
There are three options, first option "is the full liberalization of the banking and financial
services sector to foreign competition, and the second option: is the restrictions that may be
contained in the schedules of commitments in accordance with laws, regulations and policies
governing the work of the banking and finance in Muslim countries, the third refers to noncommitment to liberalize the banking sector.
The first option:
This indicates not to impose any limitations in the schedules of commitments that are
introduced in this sector, or more precisely to allow foreign presence in all forms as set out in
the schedules of commitments as stated in the draft agreement. It is expected under this
scenario for the impact on Islamic banks to be as follows.
(1) to accept deposits in all forms (ongoing - future – saving), and liberalization here allows
dealing in interest rates for local and foreign traditional banks (for term deposits and saving
deposits), while Islamic banks are working on the distribution of return actually realized for
the investment deposits, which depends on the basis of what profits are actually realized.
(2)
to allow lending in all its forms, de facto refers also to the dealing of traditional
banks, local and foreign banks in interest rates, credit and debit, and thus the credit
operations and credit are based on the taking term-benefits while Islamic banks deal with and
in accordance with the Islamic modes of financing that have been approved by Shariah
Supervisory Boards, and the funding revenue is often based on advantage vs. disadvantage
rule, which represents the basis upon which the Islamic banks operate.
(3)
The other services performed by banks, which are detailed in the schedules of
commitments, like payments and services, money transfers, guarantees, commitments and
trafficking for the bank account or customers, etc., there is no difference or a conflict in the
providing them if not committing a legitimate breach.
The effect of full liberalization of Islamic banks is to increase the competition between them
and traditional banks, local and foreign, may lead to improving the climate in which Islamic
banks operate.
Some views in the Islamic countries indicate that the liberalization of banking services has
already been in the banking market, where foreign banks are allowed and given the right to
open branches in those countries and had the freedom to deal in local currency as well as the
foreign exchange.
One of the most positive secretions for this option is for foreign banks to seek to offer
Islamic banking services to attract customers of Islamic banks (as is the case with banks that
have opened windows for Islamic banking), and the immediate liberalization of banking
services increases the degree of competition domestically and the ability of Islamic banks to
compete remains in the cost reduction and provision of Islamic banking services in a better
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way, in addition to the need to develop associated activities that require the use of
sophisticated methods and techniques.
If we look at this liberalization from another angle, it may result in that Islamic banks may
shift to provide their Islamic banking services to Member States in the WTO, leading to the
expansion of Islamic banking activities and help them achieve their goals, but actually it
refers to the weakness of the external representation of the Islamic banks, which reduces the
mutual benefit from trade liberalization in services externally.
Second Option:
This option is based on the restriction of certain banking services through laws, regulations,
policies and resolutions in force in this sector, which have been issued by the legislative and
monetary authorities, and associated guidance relevant to the banking sector and financial
support to Islamic countries. However, these restrictions will be for a temporary period, after
which full liberalization of banking services will take place, and then Islamic banks will
enjoy a period of temporary protection (and some banking activities) so that they can
strengthen themselves institutionally and organizationally and technically in order to prepare
for foreign competition in all forms.
The third option:
According to this option, the state does not undertake to open the banking sector to foreign
competition in real time taking advantage of the grace period offered by the Convention to
developing countries (including Muslim countries), and based on that, the conventional and
Islamic banks are protected for a period of time to come.
This option may be in favor of Islamic banks as modern institutions compared to traditional
ones, however states shall take advantage of this option and benefit from the protection by
organizing and arranging their positions locally and externally so that they become fully
qualified to compete in time.
The option has negative effects, in the absence of the creation of Islamic banks and their
willingness to withstand foreign competition as a result of lack of interest or inability to keep
up, thus Islamic banks will face fierce competition due to technological developments
applied by conventional foreign banks during the granted protection period and that will at
the end of the day give rise to demise and the weakness of Islamic banks which are not able
to compete in the international banking market.
The researcher finds that adopting the option of gradual liberalization is appropriate for the
States and Islamic banks, so it can liberalize some banking services where the Islamic banks
have the absolute or relative advantage at the present time, provided there shall be graduation
in liberalizing other services that Islamic banks are still in need of doing more effort in the
future.
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5. The Negative Effects of Globalization on Banking Sector
The liberalization of trading in banking services has created a kind of unequal competition
between international banks and local banks, including Islamic banks, which are still
unprepared to deal with this competition; due to the limited size, and the weakness of their
economic potential, modest services compared to services in foreign banks. The international
foreign banks did not find difficulties in the kidnapping of the large Financial Operations
from the mouths of local banks; conventional and Islamic banks, because of the difference
potential and the availability of modern advanced technologies.
The presence of foreign banks in countries where Islamic banks are, enables foreign banks
move money, according to their own advantage as a result of the speed decision-making,
without regard to the controls the Islamic banks commit to, while financial and banking
institutions, often need a sufficient time until the issue is finalized with the Shariah
Supervisory Board; the fact that the decision-makers in those institutions can not decide on
what's happening until consultation with Shariah supervisory board, which requires a fulltime work for the body to be connected permanently.
The liberalization of trade in banking services sharply reduces or eliminates the support of
infant industries from the Islamic financial institutions, which undermines the role of Islamic
financial and banking institutions in investment and development.
Positive effects of globalization on the banking sector:
The liberalization of trading in banking services will raise the adequacy and effectiveness of
Islamic financial and banking institutions to prove their existence.
Developing methods and banking practices using the latest technology available in the world.
Identifying the best management and accounting techniques and to benefit from the
accumulation of experience with foreign banks.
Islamic banks can take advantage from reciprocity, and ask for similar facilities in the
countries of foreign banks, either by establishing complete banks or branches, which convey
the idea of Islamic banks and financial institutions to the developed countries. Here comes
the role of Islamic awareness in the proper dissemination of sound thought, thereby
enhancing the role of Islam and civilization in leading the world.
The organized Western campaign against the Islamic banks and despite the negative impact,
it has positive impact on the level of development of Islamic banking, funding them with
returnable capital by way of investing them in the banks and namely western capital markets.
The positive impacts increase in case the Islamic banks succeed in creating investment tools
of more efficiency and if they can manage to attract the Arab and Islamic private sector in the
recruitment of its funds by providing advanced banking services competing the services
rendered by the usury banks (for example, Gulf wealth invested abroad is worth $ 1200
billion).
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The challenges facing Islamic banking:
in the Historical reading of the Islamic banks, it can be said that: The sixties decade of the
twentieth century was the era of the theoretical talk on the establishment of Islamic banks.
The seventies decade came to witness the establishment phase of Islamic Banks at the
grassroots level, formal and still ongoing. The eighties decade was the era of consolidation
and proof of status and merit. The nineties decade witnessed the international breakthrough
of Islamic banks, with the beginning of the twenty first century, the decade of enormous
challenges facing Islamic banks began with the increasing trend towards the globalization of
finance and economics.
Islamic banks across the world are facing in recent months after the events of 11 September
2001, the most serious challenges since inception more than thirty years.
Perhaps the events of September were the piece of hair that broke the camel's back, as a
favorable opportunity came before the interest-based system to tarnish the image of Islamic
banks. Banks and all Islamic economical institutions are deemed to be a practical competitor
to the interest-based system through the continuous success of these banks and the rates of
high profits annually achieved.
6. Future Strategic Determinants of the Islamic banks
It is expected that Islamic financial institutions including banks may encounter difficulties
and heavy losses reflected in a decline in market share and pressure on the levels of
profitability, given the modest capabilities and capacities of some banks as compared with
traditional financial institutions that have a significant comparative advantage, particularly in
the banking services (21). In order for Islamic banks to benefit from the positive aspects of
banking services trade liberalization agreements, they will need to plan for this by identifying
features of the strategy, which is as follows:6.1. to provide comprehensive banking services:
The comprehensive bank is that bank which provides integrated banking and financial and
investment services at the global level. The mega bank is a global financial institution owns
at least $ 150 billion of international assets, and has usually a tier one capital of not less than
$ 12 billion. The goal to create mega banks is to make use of economies of scale and
rationalization of expenditures and the ability to compete on several fronts as well as control
to impose conditions and restrictions. Although Islamic banks do not have this size of capital
and assets, yet, they are considered comprehensive and in accordance with the functions and
objectives, and therefore could play a greater role in the future under the Convention.
6.2. coping with technological development:
The quest to keep pace with technological development must be a key target for Islamic
banks to be configured to compete locally and abroad, provided that this be done, according
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to a deliberate strategy and a clear vision and appropriate technologies for the economic
realities of the Islamic banks. One of the pillars the strategy should be based on in this regard
is the following:
First: to increase investment in technology so as to make a real breakthrough in Islamic
banks use of modern technologies.
Second: a focus on electronic banking services that Islamic banks find a competitive
advantage in, such as Islamic banking services.
Third: the preparation and training and development of human resources skills in dealing
with the modern mechanisms in order to increase the prospects for growth and profitability of
Islamic banks.
6.3. fulfillment of international banking standards
That is represented in compliance with the financial and regulatory rules and attention to the
financial position of the Islamic Bank, and good management to ensure the safety of its
financial position and skeptics lose any pretext to liquidate it.
In the area of organization and development of standards, it is not possible to ignore the
principles and international standards such as those recommended by the Basel Committee
and are being applied to traditional financial services industry, it must be studied and
considered in its application and dealing with issues and risks faced by Islamic banks and
without the omission of basic requirements of these institutions (22).
There is no doubt that a genuine market for borrowing between Islamic banks will be an
important step towards enabling them to maintain the appropriate level of liquidity without
having to maintain a large number of short-term assets, through fulfilling procedures and
meet standards issued by competent international institutions with.
6.4. to provide Islamic banking schedules of commitments:
The central banks in Islamic countries may adopt a consolidated views on the Islamic banks,
through their governments, and also the international Islamic financial institutions , which
have received wide acceptance and recognition by international organizations (the Islamic
Development Bank - Jeddah, and the Accounting and Auditing Organization for financial
institutions in Bahrain, and Financial Services Board and the General Council for Islamic
banks) may play an important role in the provision of threshold protection for Islamic banks
through deep understanding of the obligations set forth in the Convention and the need to
advise the Islamic countries that are negotiating to accede the current period and those which
were admitted as observers and other countries seeking to join.
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6.5. to consolidate closer relations with correspondent foreign banks with branches and
Islamic windows:
Those relationships can be consolidated through the services exchanged between Islamic
banks and corresponding foreign banks that maintain branches and windows designed to
provide Islamic banking services.
So that the larger objective of Islamic banks is to expand in the dissemination of Islamic
Banking through the traditional banks, which can increase the size of Islamic transactions at
the global level, and enhance the ability of Islamic banks in influencing the bargaining power
of the States that these banks belong to, thus widening the circle of financial institutions (The
list includes Islamic countries and other non-Muslim), which call for granting privacy to
Islamic banks in the schedules of commitments concerning banking and finance, until it is
taken into account during the negotiation rounds and meetings for the next financial services
agreement.
6.6. of integration & merger between Islamic banks:
Said agreement on the liberalization of financial services has added a new dimension to the
need for integration, due to opening of the financial services markets (banks - insurance
companies - the stock market and institutions working in the field of securities) in the
countries signatories to this Convention, which owns about 95% of the market for financial
services in the world, and thus the internationalization of banking and financial services and
expand across borders through subsidiaries abroad or through branches of financial
institutions in the mother country (23).
However, the increase in the size of the entity has drawbacks that should be taken into
account and represented by the administrative difficulties of the sheer size and follow-up,
audit and accounting and interdependence between departments, as it may result in
weakening of its position, and therefore it is inevitable to adopt integrated vision of necessary
reforms in the structure and functions of Islamic banks Under the merger (24).
The aim of this integrated vision is to increase the competitiveness of Islamic banks, by
reducing the average productive unit cost and achieving internal savings resulting from
reduced administrative services and strengthen the ability to invest in human resources and
development of their skills and expertise through training allocation (25).
Consideration could be given to the benefits of integration of Islamic banks by achieving
self-sufficiency of Islamic financial resources to achieve economic development in the
Islamic world, and establish trade exchange between the countries that have integrated
replacing foreign commercial exchange with other countries to some extent (26).
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The determinants of Islamic banks strategy must take into account all the variables global or
local, so that those Islamic banks can survive and deal in the international banking market
under the Convention on International Trade in banking services.
Recommendations
This study resulted in a number of recommendations relating to the Islamic countries, we
quote briefly in the following paragraphs:
(1) Reduce and remove the barriers imposed by some governments on Islamic banks, so that
Islamic banks may gain a priority of providing services to clients across the Islamic
countries.
(2) To adopt the option of gradual liberalization of banking services to be compatible with
the current situation of Islamic Banks, and liberate some of the terms of the agreement where
Islamic banks are gaining a comparative advantage.
(3) Consolidation of efforts between the Islamic countries to come out with gains through
rounds of negotiations and meetings convened for the future World Trade Organization.
(4) the need to include services provided by Islamic banks in the schedules of commitments
on banking services of Islamic countries in particular to countries that apply the dual banking
system.
(5) Vigorously pursue the establishment of banking and financial and an Islamic common
market on purpose to increase the competitiveness of all Islamic banks.
Footnotes and References
(1) Jay Drydyk, Globalization and Multi-cultural Knowledge of Human Rights
(www.bu.edu/wcp/Papers/Huma/HumaDryd.htm),
(2) Marginson, S. and Rhoades, G. (2002). Beyond National States, Markets, and Systems of
Higher Education: A Glonacal Agency Heuristic, Higher Education, 43 (3), 288.
(3) Appadurai, A. (1996). Modernity at Large: Cultural Dimensions of Globalization.
Minneapolis: University of Minnesota Press.
(4) Held, D., McGrew, A., Goldblatt, D., and Perraton, J. (1999). Global Transformations.
Stanford: Stanford University Press, p:1.
(5) Faquir , Raed " globalization and Military Industrialization": a devastating impact on the
third world, civilized dialogue, No. 1752 published on 2/12/2006, and made available to the
following web site: ttp: / / www.islamset.com / arabic / aioms / globe / briefs1.html.
(6) Kholy, Osama Amin, the Arabs and globalization, research and discussions of the
intellectual Seminar organized by the Center for Arab Unity Studies, Center for Arab Unity
Studies, Beirut, third edition, 2000.
(7) Fukuyama, Francis, The End of History, translated by: Hussein al-Sheikh, House of
Arabic Science, 1993 ..
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(8) Yasine, Al-Sayed , in the concept of globalization, Al Mustaqbal Al Arabi magazine,
Number 228, February. 1998.
(9) Hanafi, Hassan, western globalization and Islamic globalization a dialogue published on
the website 2006:
http://doha2006.20at.com
(10) See dr. Ahmed Zewail, the wealth of nations and the revolution in thought, an article on
the website www.masrawy.com
Visited on 18/8/2009.
(11) See dr. Ahmed Zewail, the wealth of nations and the revolution in thought, an article
on the website www.masrawy.com
visited on 18/8/2009.
(12) Bashir Ghadban , from dependency to globalization, from international economic
relations to the global economy, Naba'a network news media, an article contained on the
website www.annabaa.org
visited on 18/8/2009.
(13) Abd al-Amir Shamkhi Alshlah, Globalization: Visions of critical analysis, an article on
the website www.althakafaaljadeda.com
visited on 20/8/2009.
(14) William K. Tabb (2003) After Neoliberalism? Monthly Review , Volume 55, Number 2
(15) John Bellamy Foster (2002) Monopoly Capital and the New Globalization, Monthly
Review, Volume 53, Number 8
(16) Michael A. Lebowitz (2004) Ideology and Economic Development, Monthly Review,
Volume 56, Number 1
(17) William K. Tabb (2000) After Seattle: Understanding the Politics of Globalization,
Monthly Review, Volume 51, Number 10
(18) Al-Atrash, Mohammed, projects and Eastern Arab world, Arab Future, for the year (19),
number (210), August. 1996.
(19) Abdel-Hamid, Rashid, mechanisms and systems of globalization, the Arab world
Internet, 4 December 2006.
(20) Financial Times, 16 March, 1999
(21) Mohammed Abdullah Al-Mulla, response and interaction with the requirements of
change represent the mainstay of the economic life of contemporary Arab Banks, success and
Arab banks in a changing world, 2002, 393-394.
(22) Munawar Iqbal ..et al , the challenges facing the Islamic banking, Islamic Institute for
Research and Training, the Islamic Development Bank - Jeddah, 1998, p. 70.
(23) Hatidh Kamil Ghandor , mergers and acquisitions from the Egyptian perspective, Arab
financial sector in the face of the age of mergers and acquisitions (experiences), Union of
Arab Banks, 200, p. 293-294.
(24) Saleh Jamil Malaika, integrating the Islamic banking system and its development at the
national and regional levels, the fifth Islamic Forum , p. 11.
(25) Ibid, p. 10.
(26) Ahmed Abbadi, the integration of Islamic banking system and its positive effects on the
Islamic world, p. 3-4.
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Ömer AKAT
Faculty of Economics and Administrative Sciences
Uludağ University, Turkey
[email protected]
İsmail DÜLGEROĞLU
Faculty of Economics and Administrative Sciences
Uludağ University, Turkey
[email protected]
MARKETING MANAGEMENT DURING CRISIS
Abstract
Crisis is any unplanned event that can cause death or significant injuries to employees,
customers, or the public; shut down the business; disrupt operations; cause physical or
environmental damage; or threaten the facility’s financial standing or public image. In order
to deal with crisis, crisis management and marketing management should be used. In a crisis
condition consumers tend to demand less or not at all. Demand is the key to success of a
marketing management. Therefore whether there is an any kind of crisis or not, marketing
managers must understand consumer needs, wants and demands. In each demand state,
marketing men must identify the underlying cause(s) of the demand state and then determine
a plan for action to shift the demand to a more desired state. Especially three different ways
are sentenced in literature to shift demand in crisis. These are strategical planning, pricing
and promoting. Although these three instruments are also used in non-crisis times, their
usages in times of crisis are to be taken differently.
Keywords: Marketing management, crisis.
1. Definition of crisis
The US Institute for Crisis Management defines a crisis as: ‘A significant business disruption
which stimulates extensive news media coverage. The resulting public scrutiny will affect the
organization’s normal operations and also could have a political, legal, financial, and
governmental impact on its business.’ The advice of crisis consultants (such as Douglas
Hearle) is that the corporate executives need: to act fast; to be the ones to reveal facts first; to
spell it all out fully; to be factual; to be frank and forthright; to remain focused; to ensure the
appropriate facilities are available; to seek feedback; to be prepared to express feelings and
compassion to any people hurt (Warner, 2003, p.6).
Another definition for crisis is, any unplanned event that can cause death or significant
injuries to employees, customers, or the public; shut down the business; disrupt operations;
cause physical or environmental damage; or threaten the facility’s financial standing or
public image (Clark 1995/1996).
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There is no “if” that a business will face a crisis; it is, rather, a question of “when,” “what
type” and “how prepared” the company is to deal with it (Mittroff et. al., 1996).
In his article Stephen Brown (2003) argues that crisis is a temporary state of heightened
anxiety, whereas marketing is semi-permanent representation. With a right representation of
marketing tools crisis can be solved, achievements can be reached.
Crisis needs to be addressed by ‘a turnaround’, by a process of ‘transformational change’.
The management literature suggests that the features of such a change process include
(Warner, 2003, p.6):
ƒ an emphasis on open and honest communication;
ƒ a willingness to listen to employees and draw upon their expertise;
ƒ offering constant feedback; setting conservative, limited goals at first;
ƒ only later, and building on initial modest success, try more aggressive goals;
ƒ start small and win often;
ƒ experiment, and learn from failure;
ƒ constantly review, revise and enhance;
ƒ provide staff with a vision, a manifesto;
ƒ act as a team, as a coalition;
ƒ win people over;
ƒ don’t demean and humiliate
2. Crisis Management
An obvious, exciting dimension of crisis management for the marketing expert is the
unpredictability of the inquiry: any potential crisis could spawn a financial and production
nightmare for the company, yet the warning signs of an emerging crisis can be used to take
proactive steps that avert a costly gaffe. Risk mitigation is critical for entrepreneurial success;
the ignorance of the damage that risk could inflict is a myopic tendency that must be
countered. Crisis management technology constitutes a new and potentially revolutionary
prescriptive remedy. Marketing experts must play an increasingly responsive role in this
mission (Barton, 1994, p.45).
A crisis can consist of four different and distinct stages (Fink, 1986). The phases are:
1. prodromal crisis stage
2. acute crisis stage
3. chronic crisis stage
4. crisis resolution stage
In the field of medicine, a prodrome is a symptom of the onset of a disease. It gives a
warning signal. In business organizations, the warning lights are always blinking. No matter
how successful the organization, a number of issues and trends may concern the business if
proper and timely attention is paid to them. Whether the acute symptom emerges suddenly or
is a transformation of a prodromal stage, an immediate action is required. Diverting funds
and other resources to this emerging situation may cause disequilibrium and disturbance in
the whole system. It is only those organizations that have already prepared a framework for
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these crises that can sustain their normal operations. During chronic stage, the symptoms are
quite evident and always present. It is a period of “make or break.” Being the third stage,
chronic problems may prompt the company’s management to once and for all do something
about the situation. It may be the beginning of recovery for some firms, and a death knell for
others (Kash & Darling, 1998, pp.181-182).
In an approximately resembled view Dominic et. al. 2005 also defines crisis management
process; as a basic guiding framework, a crisis management approach conceives of crisis as
occurring in a minimum of three phases:
1. A pre-crisis of management
2. The focal operational crisis
3. A post-crisis phase of recovery and a learning feedback loop to the next crisis of
management.
3. Marketing management and demand relationship
The marketing man must try to understand the target market's needs, wants, and demands.
Needs are the basic human requirements. People need food, air, water, clothing, and shelter
to survive. People also have strong needs for recreation, education, and entertainment. These
needs become wants when they are directed to specific objects that might satisfy the need. An
American needs food but may want a hamburger, French fries, and a soft drink. A person in
Mauritius needs food but may want a mango, rice, lentils, and beans. Wants are shaped by
one's society. Demands are wants for specific products backed by an ability to pay. Many
people want a Mercedes; only a few are willing and able to buy one. Companies must
measure not only how many people want their product but also how many would actually be
willing and able to buy it (Kotler, Keller, 2006, p.24).
Marketing men are criticized that "marketing men create needs" or "marketing men get
people to buy things they don't want." Marketing men do not create needs: Needs preexist
marketing men. Marketing men, along with other societal factors, influence wants. Marketing
men might promote the idea that a Mercedes would satisfy a person's need for social status.
They do not, however, create the need for social status (Kotler, Keller, 2006, p.24).
Marketing men are skilled in stimulating demand for a company's products, but this is too
limited a view of the tasks they perform. Just as production and logistics professionals are
responsible for supply management, marketing men are responsible for demand management.
Marketing managers seek to influence the level, timing, and composition of demand to meet
the organization's objectives. Eight demand states are possible (Kotler, Keller, 2006, p.10):
1. Negative demand- Consumers dislike the product and may even pay a price to avoid it.
2. Nonexistent demand - Consumers may be unaware or uninterested in the product.
3. Latent demand - Consumers may share a strong need that cannot be satisfied by an
existing product.
4. Declining demand - Consumers begin to buy the product less frequently or not at all.
5. Irregular demand - Consumer purchases vary on a seasonal, monthly, weekly, daily, or
even hourly basis.
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6. Full demand - Consumers are adequately buying all products put into the marketplace.
7. Overfull demand - More consumers would like to buy the product than can be satisfied.
8. Unwholesome demand - Consumers may be attracted to products that have undesirable
social consequences.
In each case, marketing men must identify the underlying cause(s) of the demand state and
then determine a plan for action to shift the demand to a more desired state.
In a crisis condition consumers tend to demand less or not at all. Demand is the key to
success of a marketing management. Therefore whether there is an any kind of crisis or not,
marketing managers must understand consumer needs, wants and demands. A marketing
manager must find a way to shift the demand into a more desired state.
4. Dealing With Crisis in Marketing Management Concept
Economic crises hit consumers psychologically as well as economically. During such times,
they say that they feel less secure in their employment and argue more about financial
matters; they feel the need to work more just to maintain their lifestyle, and that they no
longer find any enjoyment in being a consumer. Consumers also adapt their shopping
behaviour and habits, to be able to adjust to the changing economic conditions (Köksal,
Özgül, 2007, p.327).
Lessons learned from the past 25 years show that companies are also affected in many
different ways by economic crises. Some are forced to close down and others to drop their
production capacity because of insufficient consumer demand for their products and services
combined with fierce competition in the marketplace. Along with the economic crisis, input
prices go up and result in higher costs for companies, which inevitably increase their prices
to customers. All these negatively affect their competitiveness in the marketplace.
Companies are also forced to lay off some of their personnel, and reduce wages, posing
considerable managerial challenges. Managers are furthermore urged to delay or abandon
investment projects (Köksal, Özgül, 2007, p.327).
In 1936 John Maynard Keynes published a book titled “The General Theory of Employment,
Interest and Money” which attempted to explain short-run economic fluctuations in general
and The Great Depression in particular. Keynes’s primary message was that recessions and
depressions can occur because of inadequate demand for goods and services. Keynes’s
message was aimed at policymakers as well as economists. As the world’s economies
suffered with high unemployment, Keynes advocated policies to increase aggregate demand,
including government spending on public works (Mankiw, p.425). It can be understood that
in situations like global or domestic economical crisis marketing managers are restricted in
some ways to shift the demand into more desired state. The aggregate demand of a whole
market shall be shifted by governmental policies such as particular incentives and reductions
in tax rates. On the contrary in economically micro markets, demands are to be managed by
marketing managers.
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Different markets and market segments consist of different consumers. Consumers have
different values, culture, lifestyles and so different buying behavior. Therefore whatever tool
to be used to shift the demand into a more desired state, these tools can be shaped to fit the
consumers values, culture, lifestyle and buying behavior. There is no magic demand
managing tool to work in every market. Marketing men can adapt the tool they are using to
the market structure.
Companies react to changes in the marketplace by taking the appropriate measures to adjust
their corporate behavior, as consumers adapt their consumption behaviour. The best-known
general measures include reducing costs, cutting production, reducing investment, entering
foreign markets, working more with equity capital, improving efficiency, re-structuring debt,
these can have no positive impact on company performance unless they increase sales
(Köksal, Özgül, 2007, p.328).
In times of crisis there are severals ways to deal with the situation. Some important ways to
shift the lesser demands are:
1. Strategical Planning
Strategic planning as a discipline has been concurrently taught and exercised in the past 40
years. This relatively new concept has been the major thrust in the management of US
corporations. The art of strategic planning has helped the planners to forecast and cope with a
variety of forces, issues and problems beyond their operating control. The strategic planning
literature shows an experience curve in such forecasts, i.e. as mistakes are made, we learn
from them. That is how contingency planning, scenario analysis and surprise management
have evolved (Kash, Darling, 1998, p.179).
Mitigation steps such as crisis marketing planning can minimize the negative impact on cash
flow (Barton, 1994, p.41).
In terms of general strategy, companies need to withdraw from those markets in which they
are not the main players and concentrate their resources on those in which they are strong.
However, this is not a marketing strategy that can be accomplished immediately or rapidly. It
is suggested that increasing marketing expenditures, or at least maintaining the same level as
before the crisis, will increase company performance (Köksal, Özgül, 2007, p.328).
Selecting the right markets for products and positioning them in markets are main issues of
strategical planning. It is said that the most basic company strategy related to product policy
during periods of crisis is to withdraw weak items from the market. Since, consumers place
emphasis on the durability of products at such times, characteristics such as economy,
durability, and functionality should be given high priority in the development of new lines
(Shama, 1981; quated by Köksal, Özgül, 2007). It will further be advisable to allocate extra
effort to research and development, in support of new products (Williamson, 2001, p.31).
Therefore innovations must be supported in order to maintain sustainability.
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2. Price
Decreasing prices too much can effect organization’s image negatively and can make
customers anticipate lower prices permanently (Öztürk, 2003, p.125).
Shama (1978, p.50; quated by Köksal, Özgül, 2007) explained that an economic crisis forces
a significant change in the price decisions of companies, mostly in the direction of
reductions. The rationale is to increase sales volume in the short term, but this strategy can
cause serious damage to a company in the long run by lowering profitability. It could also
harm the brand image, and customers might resist moves to return to former price levels
when the crisis is over. Ang et al. (2000, p.113; quated by Köksal, Özgül, 2007) suggest two
quality strategies related to pricing in conditions of crisis: to apply the same prices for higher
quality products, or to offer the same quality product at lower prices. In the light of these
insights from the literature, pricing strategy should be integrated with other marketing mix
initiatives during the period of the crisis.
3. Promotion
The changes companies make in promotion strategies during a crisis are also of great
importance. It has been shown that those increasing or maintaining their level of advertising
will increase sales, income and market share during and after a recession (Kim, 1992, p.15;
quated by Köksal, Özgül, 2007). DeDee and Vorhies (1998, p.58; quated by Köksal, Özgül,
2007) found that firms responding by reducing sales staff and cutting advertising expenditure
fared worse, in terms of return on common equity, than those that had maintained or
increased their promotional efforts. Since, consumers can be expected to shop more
rationally when experiencing a decrease in their purchasing power during a crisis, advertising
campaigns should emphasize such rational motives as safety, reliability, and durability, rather
than image and status (Shrager, 1991, p.5; quated by Köksal, Özgül, 2007).
Öztürk (2003, p.126) pointed out that advertising and sales messages can be used in different
demand periods and right usage of promotions can manage demand. Therefore companies
must keep at least the same level of promotions before crisis, and if the there is enough
capital more promotions must be used.
5. Conclusion
Marketing managers’ main responsibility is to manage demand. In this view whether there is
any kind of crisis or not, marketing managers must shift the demand into a more desired
state. Marketing men must know how a crisis can occur and what must be done to prevent it.
Therefore shifting the demand becomes more necessary in times of crisis. In order to
accomplish this, marketing men must use tools of marketing such as strategical planning,
pricing and promoting in a right way. A marketing man must never forget to always chase
market situations and signals of crisis.
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Mehdi ZEYNALI
Islamic Azad University, Iran
[email protected]
Ata FARZAMIAN
Islamic Azad University, Iran
[email protected]
Saber FARSHIBENAB
Islamic Azad University, Iran
[email protected]
THE RELATION BETWEEN PERFORMANCE-BASED BUDGETING
AND COST MANAGEMENT
Abstract
Performance based budgeting increases the ability of decision makers to evaluate executive
budget requests with informing managers and policy makers of better information about
plan's results and outcomes. Performance based budgeting gives information about results of
spending and answers questions as follows: Do the benefits of spending resources excess the
cost? Do the managers have ability in achieving expected results? this paper first, discusses
the background and implementation of performance based budgeting in Trade organization,
Then the effect of cost management methods on cost decreasing, service rendering enhancing
and customer satisfaction is discussed. Because we are at the beginning of using this system
in Iran, Finding and result of this research can help to improve performance and decrease the
problems.
Keywords: Performance based budgeting (PBB), Efficiency, Cost management.
1. Introduction
By the expansion of governmental duties and the swift increase in Governmental expenditure
and its association with the general economic condition of the country, controlling the
expenditure got unimportant and the requirement of improvement in programming systems,
control and management in general portion of sources got into consideration. The
management for general portion of sources needs to determine the objectives and emphasize
on outcomes and then utilize cost management and novel management accounting methods
for decreasing the expenses and increasing the quality of services. The emphasis on outcomes
causes the decision makers to get a wider perspective and information about the outcomes
and the cost of performance. This matter causes governors and politicians to consider the cost
effectiveness, efficiency and economy of the governmental sources. In order to encounter this
situation, not only we need to improve the methods and budgeting procedures to increase the
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coordination in systems, but a new dimension for evaluating the governmental management
activities is needed. The feature and difference between this system and the traditional one is
in the emphasis on objectives, outcomes and calculation for cost activity and decreasing
expenses and increasing the quality of services for people.
2. Related literature
Through the researches performed inside the country on the theses, we concluded that
presently there are few writings, researches and theses about the implementation of
performance-based budgeting in organizations and the majority of these researches are not
directly related to the performance-based budgeting and cost management, on the other hand
some of them are about theoretical evaluation of performance-based budgeting and
challenges to perform it including:
1- Studies by the assistance of management development and ministry of health on 2003 as
“designing the performance-based budgeting in assistance of management and source
development range”. This plan is performed with the information gathered in the first 6
months of the year and the method of implementing the performance-based budgeting in the
organizations mentioned above is evaluated.
2-The MS theses of Mr. Zeynali in accounting in the BAHONAR university in 2006 entitled
“implementing performance-based budgeting system in governmental organizations in
Kerman province” which for these organizations a practical model of calculating the cost of
activities and programs has been offered.
3-The MS theses of Ms. Mahmoodi in AZAd university in 2005 entitled “evaluating the
problems for implementing the performance-based budgeting in weather forecast
organization and offering the methods needed to decrease obstacles”.
4- A. Toloie, R.Mohammadipor, M. Zeynali in 2008 did a research entitled “Implementation
of performance based budgeting and its challenges in IRAN” accepted for the presentation in
the applied international business conference in MALESIA.
5- M. Jordan and Merl Hackbart in 1999 did a research entitled “The Goals and
Implementation Success of State Performance- Based Budgeting”. Their findings suggest
that program accountability as a goal, rather than budget allocation, makes a stronger
foundation for determining performance-based budget success (Jordan, Hackbart, 1999).
6- W. Mark Grain, J. Brain O’ Roark in 2002 did a research entitled “The Impact of
Performance- Based Budgeting on State Fiscal Performance”. Their findings indicate that
performances- based budgeting curtails state spending per capita by at least two percentage
points. However, not all state government programs are affected equally; some budget
categories experience spending increase after the implementation of performance budgeting
(Grain, Brain, 2002).
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7- Don sung Kong in 2005 did a research entitled “Performance- Based Budgeting: The US
Experience”. The research attempted to 1) provides a brief historical context of PBB in the
US. 2) Identifying some challenges associated with the theoretical underpinnings and
operational principles of PBB; 3) Document current Practice and research pertaining to
designing and implementation and 4) discuss the prospect of PBB.
3. Research Method
For this investigation we scrutinized PBB system of Trade organizations of Iran. Research
team mainly used field studies which they gathered required data by means of direct
observation, interview and tests. As well they analyzed documents, records and financial
reports of the organizations. In view of the fact that Iran’s financial and planning
management system is based on concentrated method and also with regard to similarity of
activities and duties in governmental organizations. it is expected that this research’s result
could be generalized to the whole country. In support of having exact information about
existed situation of budgeting system and governmental policies in relation to PBB
implementation, all the regulations and notes e. g. fourth and fifth economic, social and
cultural development program regulations, budget law and official letters of Organization of
Programming and Management were gathered and analyzed.
4. Performance-based budgeting
By the evolution of governments and complication of governmental duties, concept of
budgeting has changed. This evolution can be divided into 4 stages: In the first stage,
approximately since 1920 to 1935, there has been great emphasis on creating a perfect
system to control expenditure, and the cost accounting and association between accounting
and budgeting was discussed. Second stage which emerged during the expansion of
performance-based budgeting was about budget application as financial management tool.
The third stage began with the association of budget and program as a criterion for analyzing
the economical welfare and it focused on some developments which had occurred in decision
and information technology.
The forth stage which was created through the complication of organization, was about using
the zero-based budgeting as a tool for strategic planning.
Considering the mentioned definitions, we can put the performance-based budgeting as a
process to provide budget which enables us to decide to allocate the sources to some extent,
based on effectiveness and efficiency of the services rendered with the emphasis on
activities, programs and performance management.
Most researchers and governmental budgeting experts agree on performance-based budgeting
as allocating the amounts to achieve the programmed objectives and also reaching some
working indices, effectiveness and efficiency.
In 1994, US congress has defined performance-based budgeting as follows:
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Performance-based budgeting uses words such as duty, goal and objective to explain why
money is being spent. This is a way to allocate the resources to achieve special objectives
based on program goals and calculated outcomes. There is a difference between
performance-based budgeting and traditional methods because this new method focuses on
cost outcomes more than spending money (2006, p.39).
By definitions mentioned about performance-based budgeting, it is clear that all these
definitions are about two points: the relationship between budget and performance index and
evaluation, relationship between budget and outcomes.
The lack of sources and distinctive relationship between sources and results have caused a
disconnection between providing budget, supervising cost efficiency, the vagueness in
budgeting process and lack of financial reporting system in governmental financial system to
evaluate and have a strong concentration on data caused some problems in adjusting
governmental budgeting.
The most significant policies adopted by the government of Islamic Republic of Iran are
services rendered to society in the best quality, taking all responsibility and being held for
them and the most important one, keeping people satisfied. As it turns out achieving the
policies mentioned above is impossible unless we revise and make some improvements in
procedures and systems. The policy mentioned in third five year development program
emphasized on this point. Therefore all the related organizations are forced to make their
strategic orientation based on efficient use of sources and considering the results, meanwhile
they must increase the quality of services.
In regard to the substance of article 138 of forth development program act, implementation of
PBB was suggested as follow: Organization of Management and Programming is ordered to
reform budgeting system to a rational, operational and based on total cost system. For these
objectives, it should perform the following duties up to the second year of the fourth
development program:
A: identifying the activities that the executive organizations should do.
B: determining cost of each activity.
C: arranging budget proposal according to activities volume and their cost.
D: allocating credits according to annual performance and result of activities
According to cost.
Findings
In general we can divide the PBB process into 4 parts as below:
• Determining the objectives.
• Determining the quantitative indices for estimating the expenditure and
performance of every program.
• Estimating the expenses of required programs for meeting objectives.
• Determining the budgeting deviation and controlling the budget throughout
the period.
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For determining and estimating the cost of activities and outputs, we can use activity based
costing and budgeting.ABC is a system which determines and reports the activities,
expenditure and features of activities and the income for every unit, every cost center or a
group of employers in an organization. In order to improve expenditure and management and
allocate expenses based on activity and program, the activity accounting information must be
provided. To estimate the programming and activity cost and allocate the cost, we can apply
ABC based on PBB. Applying such system may cause to increase accuracy in costing and
management of expenditure.
Performance budgeting is being completed through both budget legislation and
implementation as below:
1- Displaying performance budgeting: In this system only the related forms are being
provided, organizational services are being recognized and the cost is being
determined and a display of performance budgeting is being formed. In the
implementation of this kind of budgeting, sources are not being allocated based on
performance.
2- Output-oriented performance budgeting: In this performance budgeting system, the
organization would identify the outcomes (productions and services) and also the
activities which cause these productions to be produced. In other words they
determine the annual objectives and not just long term ones. Cost accounting methods
are also used for calculating each output unit. In this stage of budgeting, sources are
being allocated based on realization of annual quantitative amount of purposes
(amount of productions and services) in time periods through periodical performance
and based on cost of every unit of production or service.
3- Outcome-oriented performance budgeting: In this performance budgeting system, the
organization tries to identify outcomes (long term objectives). (For instance, the
leftover management organization does a series of activities to cycle one million tone
of garbage (long term objectives)so that they can reach the outcome of “increasing
the general sanitation”(long term objective)). In this system, allocating budget is
based on the realization of long term objectives.
The stages for implementing performance budgeting system based on ABC include:
1- Determination of organizational objectives and identifying the required activities and
programs to realize the purpose(identifying outputs)
2- Determination of quantitative objectives for every program and activity.
3- Identification and classification of governmental organization expenditure.
4- Identification and classification of cost into direct and indirect parts.
5- Describing the internal activities of company for indirect cost.
6- Determining the cost driver for indirect cost to allocate them into activities.
7- The accumulation of cost in activity pools.
8- Determining the activity drivers and allocating activity cost pool into outputs.
9- Accumulation of direct and indirect cost to the cost of outputs.
10- Calculating the cost of outputs for every unit.
11- Determining the cost of programs and outcomes. According to the researches that
have done at commercial organization it could be explain the implementation of this
system as follow:
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Table 1: The outputs and measure of their evaluating and the performing section of activities
outputs
Measurement index
the internal activities of its perform
Plan of regulating the foreign
commercial policy
Activity of control the rendering
Object
and extension of trade card
Activity of issuance certificate and
Commercial activity and improving the
business services
Number
control the foreign fairs
Market improving activity and
commercial services
establishment
Activity of supervision for export
Object
committee
Commercial activity and improving the
business services
Plan of regulating the internal
markets
Activity of providing and
Good items
distribution the goods and services
Activity of control the guilds and
Activity of controlling the executive
affairs of economic mobilization staff
object
Activity of guilds affairs
guild system law enforcement
Activity of issuance certificate and
Number
control the local fairs
Activity of improving market and
commercial services
establishment
Activity of services and production
price inspection
Activity of control the production and
object
services price, inspect and detect the
contraband and also the affairs of
general participation and infringement
indignation office
Activity of pricing the staple
number
goods and study and research
Activity of regulate the goods and
services market
market
Activity of providing information
number
related to export and improving
Marketing and export improving
activity
the export culture
Activity of informatics network
number
implementation and other require
Informatics and electronic commerce
activity
reports
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We recognize the group of internal activities that are as a cost consumer after defining the
cost subjects and outputs. The activities of this organization divide in to supportive and
operational activities as it is shown in below.
Table 2: Supportive activities
Item
Supportive activities
Base
1
Management control and inspection activity
Number of employees
2
3
public relations activity
Number of employees
Safe-guard activity
Number of employees
4
5
Financial and accounting activity
Number of employees
Supportive and official affairs activity
Number of employees
6
7
Typing and office activity
Number of recorded letters
Transport activity
Time spent
8
welfare services activity
Number of employees
9
10
11
Archive activity
Number of archived letters
Telecommunication activity
Number of employees
Computer activity
Number of computers
12
Storage activity
13
Supply department activity
14
publishment activity
Number of goods requisition
from storeroom
Number of purchase
requisitions
Amount of the used services
Operation activities that are the main activity of organization includes:
Table 3 : Operational activities
item
Operation activities
1
Controlling goods and services activity
2
3
4
Inspection and detection of contraband activity
Infringement investigation office
Activity of controlling the executive affairs of economic mobilization staff
5
Activity of guilds affairs
6
Activity of improving market and commercial services
7
8
9
Activity of regulate the goods and services market
Commercial activity and improving the business services
Informatics and electronic commerce activity
10
11
Marketing and export improving activity
Activity of general participation affairs and accountability of complaint
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After specify the internal activity of organization, the incurred expenses by these activities
will be as follow table. In this table at first all expenses according to supportive and
operational activities have divided in two direct and indirect parts. To be notice that the small
amount of expenses is directly tracing to outputs.
Table 4 : The list of direct and indirect expenses and their cost driver and allocation bases
Expenses
Kind of
Allocation
Tracing subject
expenses
bases
Salary expenses
direct
--------
Overtime work
direct
--------
New year’s gift
direct
--------
Education
direct
--------
Internal mission
direct
--------
Wedding and
burying subsidy
direct
--------
Education rewards
direct
--------
Financial assistance
direct
--------
Kindergarten
subsidy
direct
--------
Food
direct
--------
Contracted Services
direct
--------
Brilliant students’
reward
Expenses related to
war handicapped
direct
--------
direct
--------
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According to labors of each
activity trace to the same
activity
According to labors of each
activity trace to the same
activity
According to labors of each
activity trace to the same
activity
According to labors of each
activity trace to the same
activity
According to labors of each
activity trace to the same
activity
According to labors of each
activity trace to the same
activity
According to labors of each
activity trace to the same
activity
According to labors of each
activity trace to the same
activity
According to labors of each
activity trace to the same
activity
According to labors of each
activity trace to the same
activity
Trace to the non operation
activity of payments and to
lay labors off
According to the used
activity
According to labors of each
activity trace to the same
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
activity
Trace to the non operation
activity of payments and to
lay labors off
Trace to non operation
activity related to the retired
labors
Trace to the computer
activity
Trace to the storage activity
Trace to the computer
activity
Trace to the transportation
activity
According to labors of each
activity trace to the same
activity
Trace to the users according
to their use
allocation to the users
according to their use
Trace to the transportation
activity
Trace to the office activity
Trace to the public relations
department activity
According to users of activity
Trace to the transportation
activity
-----------------------------
Expenses related to
public relations
direct
--------
Housing subsidy
direct
--------
Internet
direct
--------
Supply
Computer repairs
direct
direct
---------------
Vehicle insurance
direct
--------
Retirement reward
direct
--------
Official reforms
direct
--------
Print and copy
indirect
--------
Vehicle
maintenance
External mission
Posting expense
direct
--------
direct
direct
---------------
Traveling expense
Vehicle depreciation
direct
direct
---------------
Building
depreciation
Land improvement
depreciation
furniture
depreciation
Installation
depreciation
Juridical expense
Telephone expenses
Gas
Electricity
water
Maintenance
Vehicle fuel
indirect
square meter
indirect
-----------------------------
indirect
Number of
employee
square meter
indirect
square meter
------------------------------
direct
direct
indirect
indirect
indirect
indirect
indirect
--------------square meter
square meter
square meter
square meter
square meter
To the juridical activity
According to users of activity
-----------------------------------------------------------------------------------------------------
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5. Cost Management System
By wonderful development in technology accompany progressive increase in international
markets competition; the managers of enterprises are forced to produce the high quality
product and rendering better services to customers with the lowest cost. These expectation ,
make more convincement to supply information’s that are essential to management
accounting .Day by Day, lots of enterprise tend to change their procedure from traditional
cost accounting to create a cost management system. Cost management system is a planning
and controlling system that follows purposes such as:
1. Estimate the spent resources for the main activities of enterprise.
2. Recognize and omit expenses with no added value.
These expenses are the expenses of activities that they have same performance with omitting
these activities but without decreasing the quality of products.
3- Determining the efficiency and effectiveness of all main activities.
4- Recognizing and estimating new activities those help to improving the future performance
of enterprise. As it turns out cost management’s emphasis is on the activities of organization.
This sometimes called Activity Accounting that is vital for manufacture with lowest cost, and
high quality .It is unavoidable and necessary to analyze the activity of organization and omit
the activities that have none added value for realizing the targets of cost management and
increasing the quality of products. For omitting the none added value activities it’s essential
to recognize the organization’s value chain.
Value chain includes value creation activities from providing materials until delivering
product or rendering services as follow:
Providing
materials
Research
and
development
Designing
Producing
Marketing
Distribution
Rendering
services
to customers
To acquire the objects effectively in an organization, it’s suitable and important that the
managers identify the whole value chain and it help the managers to ask or answer question
about the guideline of their organizations.
Considering the relation between performance based budgeting and cost management is the
attitude of this essay and also this budgeting system is used often by none- profit
organization and governmental agencies , so the question is " How can we join cost
management and performance budgeting?
At first to make the subject clear we ask questions as follows:
_ Is it possible to identify the value chain in the governmental agencies?
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_Is the term increasing the customer/s satisfaction is the same concept as value creation?
_Do the emphasis on the results of spending causes the better quality of give services to the
people.
_Do the specification of objects and activity’s quantity cause the economy in governmental
expenses?
_finally, does the performance based budgeting system cause the decreasing the expenses
and increase the quality of services (cost management system).Successful accomplishment of
performance budgeting system require to evaluate cost and creation cost management
system.
In the performance based budgeting system by convincement of executive organizations to
considering the outcomes of programs, It/s tried to improve the effectiveness, efficiency and
accountability of governmental plans.
This system with providing better information about the expenses effectiveness and
governmental programs helps to Improving the plan’s performance and governmental
performance information to the parliament for making policy and supervising the plans and
making spending decisions.
Creating more clear and closer relation between the resources and out comes is the object of
this system. Performance budgeting is a current process that involves all the managers of
organizations, from the (top managers) to each one of the program managers and subsidiary
managers. This process includes a feedback cycle that gives correct information to the top
level managers for managing the activities.
Eventually, performance based budgeting with suitable costing system and cost management
system cause the best productivity of organization’s resources. Managers will be able to use
available resources to achieve the planned targets effectively. This system is foundation of
comprehensive cost management system in the strategic program of an organization and
could take the advantage of services delivered by people with discussing the new subjects of
accounting such as, activity based costing, total quality management, value engineering,
continuous improvement, benchmarking .
Managers of organizations introduce the term "continuous improvement" as a nonstop
activity to decrease the cost during the production cycle or rendering services. Continuous
improvement means achieving the preplanning reduction in cost driver in the process of
delivering services. Using the continuous improvement in the performance based budgeting
system effects to gradual decline in expenses. This system with use of total quality
management in the whole value chain and it/s activities is able to improve the quality of
rendering services to people. In this system each part of organization analyses its
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performance and they try to cover the objects. Total quality management pays no attention to
quality cost, but they are able to emphasize on non financial measure performance that is
useful and effective for routine controlling of aims. Organizations for being informed of their
performance and finding the best approaches search continuously the most effective perform
by comparison between the extent methods and performance levels with other familiar
organizations. performance based budgeting system can create specific standards of quality
and performance by value engineering. In this procedure, specialist and experienced
employees analyze the processes and activities one by one and opine about the executive
methods. In this phase management accountants can help managers to decrease the cost of
activities.
Outcome oriented and customer-oriented and market axial approach is the main axis of 4th
and 7 program of evolution in the country/s official system and also will guide the
management Performance in the governmental agencies. The main appearance area of 3
mentioned Approaches is depended to Organization’s Performance and the manner of
resources allocation.
The Organizations that can have logical relation between resources and outcomes will have
effective device for their Performance, document the annual results and advocate appropriate
budget.
It/ is obvious that the base of this work starts with these three approaches and finishes with
accountability of authorities and Organizations. This achievement is impossible without
doing exact adjustments in current expenses, so, it needs more attention to do the rules of
budget for evaluating cost of activities. Cost management system is a part of Performance
based budgeting system and beside evaluating cost of activities, both of the cost management
and omitting the none added value activities are necessary for better Performance. Using
activity based costing, bench marking, continuous improvement, total quality management
cause progressive decline in government expenses and increase the quality of rendering
services and it make customer satisfaction, and on the other hand, greater transparency in
information increases ability of government accountability.
Conclusion
Performance based budgeting implementation and creation of a suitable cost management
system is a cooperative job.
Because the government emphasizes on the outputs and calculation of cost , decision makers
can evaluate government’s performance in the better way. It can’t be expected that
implementation of PBB is only related to the budgeting and financial entity. It requires
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participatory operations to estimate preplanning activities volume and determine cost of
every activity and also omitting the none added value activities for customer and cost
management.
So there is a need to create a new job culture in accounting, budgeting and organization
activity areas, which do the serious role of management and other part of Organization
during this process. Performance based budgeting with cost management causes better
outcomes when it is used skilled and efficient employees because the best laws may affect
conversely in program outcomes. Totally, Performance based budgeting by skilled or
professional employees and also with recognizing the quantity of the plans, objects, cost and
using the newest management accounting system such as total quality management, bench
marking, value engineering and activity based costing induce customer satisfaction and
rendering quality enhancement with less cost.
Finally, increase the efficiency and effectiveness of governmental resources , making the
activities transparency , state accountability are the consequence of this system.
Rererences
Crain, W.M. and O’Roark, J.B. (2004). “The Impact of Performance-Based Budgeting on
State Fiscal Performance”, Economics of Govermance, Vol. 5, No. 2, pp.167-186.
Edmonds, T.P., Edmonds, C., Tsay, B. and Olds, P.R. (2004). Fundamental Managerial
Accounting Concepts, McGraw Hill.
Garrison, R., Noreen, E. and Brewer, P. (2000). Managerial Accounting, McGraw Hill.
Hendon, C. (1999). “Performance Budgeting in Florida-Half Way There”, Journal of Public
Budgeting, Accounting and Financial Management, Vol. 11, No. 4, pp.670-79.
Horngren, C.T., Foster, G. and Tatar, S.M. (2000). Cost Accounting: A Managerial
Emphasis, 10th Edition, Prentice Hall, New Jersey.
Jordan, M.M. and Hackbart, M. (2005). “The Goals and Implementation Success of State
Performance Based Budgeting”, Journal of Public Budgeting, Accounting and Financial
Management, Vol. 17, No. 3, pp. 471-487.
Kong, D. (2005). “Performance Based Budgeting: The US Experience”, Public Organization
Review, Vol. 5, No.2, pp.91-107.
Merc er, John (2004). Cascade Performance Budgeting, (bu elektronik bir yazılım ne için
kullanmış anlamadım)
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Melkers, J. and Willoughby, K. (1998). “The State of States: Performance-Based Budgeting
Requirements in 47 out of 50”, Public Administration Review, Vol. 58, No. 1, pp.66-73.
Srikant, S. and King, S. (2005). “Competing for funds in austere time: how to win with
performance- based budgeting”, Journal of governmental financial management, Winter.
Toloei, A., Mohamadipor, R. and Zeynali, M. (2008). “Implementation of performance
Based and its challenenges in Iran”, Applied international business conference.
Walters, T.H. (2002). “Performance Based Budgeting and Performance Based Costing”, The
DISAM Journal, Winter 2001-2002, pp. 57-64.
Young, R.D. (2003). Performance Based Budget Systems, Public Policy and Practice, USC
Institute for Public Service and Policy Research, Columbia.
Zeynali, M. (2006). Implementation of Performance Based Budgeting in Governmental
Organization in Kerman Province, Unprinted PhD thesis, Shadid University of Kerman,
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Oktay Orçun BEKEN
Giresun University, Turkey
[email protected]
SUSTAINABLE DEVELOPMENT, OFFSHORING AND
SUPPLY CHAIN MANAGEMENT IN DIFFERENT ANGLE AT A GLANCE
Abstract
Two different economic systems, economic theory under the group title. One is the capitalist
economic model, while the second one is the socialist economic model. Both very different
aspects of the system, as is common for a while there are areas where. For example, in both
models and the emerging use of resources in less developed countries are joining in. This
topic can be given the best example is the cotton production in Uzbekistan. Uzbekistan also
produced cotton, raw materials in factories moved to Moscow were treated. This is because
the central government, central as well as other countries depends on the final (complete) in
terms of goods and services can be controlled to prevent the possibility of independent action
was the desire. Indeed, in the process of disintegration in the next period, cotton produced in
Uzbekistan for a while as raw material continued to be sent to Moscow. After the
disintegration process of winning their independence one by one, start a new process for
community countries were. This process, the countries that adopted the capitalist market
model (USA, Canada, UK, Germany, France, Italy and Spain) to come to this land through
the company and also is the process of creating pressure on raw material sources. The next
process of the socialist system, capitalist system with a similar time as the process is out of
our face. Still produced cotton textile production formerly done capitalist countries with raw
material purchased by, and again after it has been transformed into products in these
countries with more choice and a range of products under the brand impose re-entry to the
country has been.
Keywords: Sustainable Development, Offshoring, Supply Chain Management.
1. Introduction
Sellin a community economic, social and legal ways to organize the economic system is
called. In other words, the economic prosperity of the society adopted to make the maximum
economic, social and legal organization is a way. Two different economic systems in the
theory of economics under the group title. One is the capitalist economic model, while the
second one is the socialist economic model. General definition of capitalism with the
production of goods by the person or persons is to a large extent the organization of
production. This person or persons, their accumulated capital to purchase raw materials and
machinery and labor are rented. With them, spending more than one, generates wealth and
thus provide profits. Merged with the basic features of capitalism constitute a system
(Talas,1999, pp.51-52). These features are (Bremond, Geledan;1984, p.8):
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• Basic production and exchange of ownership of the means is special. Thus the
system of capitalist economic structures and decision on the motion is granted authority.
• Capitalism in the path of economic activity, and the economy showing the main
direction of the target set is a type of motive. This is the basic profit motive.
• Most of the produced goods are objects. The goal of production, direct
consumption, but is the change. Goods in the market to be sold are produced.
• The role of entrepreneurial capitalism, the means of production have an economic
system founded upon. The market mechanism and capitalism, a price formation system based
on this mechanism is available. Individuals in the system to sell, get the best deal for their
own interests and is free to
• Capitalism's role is important in the capital. Just as capital but also the presence of
the effects of this capital and must give direction to the economy. Also a source of income
status under capitalism is capital (profits, rant, interest).
• An important part of the population in the capitalist system of labor is sold for a fee.
• Capitalism in itself will create conditions favorable to the processing logic in a
legal-economic organization available (liberalism, individualism, private property,
inheritance, freedom of contract, etc. ...).
Socialism in a general way, the society's ownership of the means of production will be put
into individual production facilities of the society benefit equally from the production of
service to the community with the goal of a classless planning and the realization of personal
freedom in order provides for an idea can be described as flow.
Production of goods and tol me a socialist or socialism itself on producing a model of central
authority in control of economic affairs of society or the private sector, not the means to
belong to the public. Socialism's fundamental principles;
• Socialism is totally against the capitalist order.
• Needs of individuals in society are met in the best way, but in a layout that is based on
collective ownership conditioned.
• Especially in the soil and the production of the goods can not be private property.
• Individuals in the economy, not the interests of society must be decisive.
• To improve the possibilities of the society, everyone must work within the bounds of
their own and society should take equal shares in the revenue.
• Should be no class distinction in society.
Both very different aspects of the system as well as space for a while that also is common.
For example, both models are developed and underdeveloped countries are joining in the use
of resources. This topic can be given the best example is the cotton production in Uzbekistan.
Between the years 1917-1991 was the implementation of the socialist economic system the
Soviet Union (USSR) countries, which is one of Uzbekistan (1925-1991), for the production
of cotton cloth has a very broad and fertile ground. During this period, the Soviet Union in
countries of production methods are visible in the following way. Uzbekistan also produced
cotton, moved to Moscow in raw materials are traded in factories. This is because the central
government, central as well as other countries depends on the final (complete) in terms of
goods and services can be controlled to prevent the possibility of independent action is
desirable. Uzbek people, the land by planting, processing and product of an intensive effort
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
by collecting much of the cotton has become how the finished product is not even never.
Indeed, in the process of disintegration in the next period, cotton produced in Uzbekistan as a
raw material continued to be sent to Moscow for a while. Uzbekistan may become raw
material products because infrastructure and facilities not available.
There are other communities with similar raw material sources in the country at the center of
the technology that has been established in Moscow. Kolodko also made of the Turkish
Republic of dependence on a single (Azerbaijan, Kazakhstan and Turkmenistanhydrocarbons, Uzbekistan-cotton), brought the collapse COMECON'un external shocks and
poor macro-economic management and regional hot conflicts in the period after the
dissolution to the economic crisis of the main reasons that constitute is considering (Kolodko,
2000).
Even worse is that this process of transforming into the products of a single product even in
these countries perform. Process of political and economic independence after the
disintegration of the country for the winning community is starting a new process. This
process, the countries that adopted the capitalist market model (USA, Canada, UK, Germany,
France, Italy and Spain) through international companies to come to this land and also create
pressure on raw material supply process. But the capitalist economic model for the region has
brought some differences that are visible in the title. Completely independent and free
country that they need to do to the economy in transition stages within specific plans have
been taught. Become open to foreign countries and country of foreign capital inflows could
have been made for the necessary arrangements. Table 1 Examples of these arrangements can
give in the title.
Table 1. Direct Equity Investment to the Czech Effective Policies
Incentive measures
Effective administrative procedures and rules, a minimum of bureaucratic
process
Appropriate labor and wage policy
Privatization Policy
Stability (economic and political)
Taxation Policy
Membership in Economic Integration
Membership of the World Trade System
Competition Policy
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Governments, investment allowance, customs duty, or immunity of the installment plan,
incentive measures, such as cheap credit and foreign capital to invest may care. However,
these applications often encounter issues such as environmental protection and raw material
resources is not possible.
The next process of the socialist system with the capitalist system as a process that resembles
the face for a while we are out. In the example that we have provided raw material, cotton,
textile production made by the capitalist countries is the purchase and again in these
countries into the product after it has been much more choice with a range of products and a
trademark case under coercion (the ad through) the country has made re-entry. Can be seen in
both systems are the following principles are common. And value-added raw materials to be
supplied from the region to create the finished product much more in the process of foreign
dependence, nitekim for the newly independent countries do not have any change. Especially
after 1980 until the 1997 Rio Summit, the same process than the process has been
unchanged. This difference should be explained before why change is necessary to have a
look.
2. Historical Transformation
1929 economic crisis and bring the shocks lasted for about thirty years, and the capitalist
economic model applied in countries that should not be a factor, the state's role and
intervention in the economy came to a very high level. This downturn in the economy allows
the state's role was re-questioning. Seeking escape from the Depression in 1929,
technological advances, II. The destruction brought by World War II efforts to repair,
enhance international capital production process, and after the pre-war factors such as
increasing capital-labor conflict to make new arrangements has forced the capitalist system.
II. In the aftermath of World War II Keynesian demand policies has become an important
position in the economic field. Economic stability to the state in ensuring an active role in
these policies which, at that time of budget revenues and expenditures to be manipulated by
increasing the level of aggregate demand at the same time also increasing employment
opportunities solves the problem of unemployment (Başkaya, 1999, p.86).
This government budget deficits along with intensive intervention, and this requires giving
the government budget deficit by printing money is trying to go through. During that period
the most money of the United States pressed countries to be one of the world monetary
system is applied (Bretton Woods, from 1946 to 1971) to lose effect over time has caused.
After 1960, developed new economic currents more effectively in the private sector to exist
and the need for any intervention in the state's economy was not envisaged. Because the
literature in the 1970s, the economy added a new concept, the concept of stagflation, the
Keynesian policies of the regulatory logic is not functioning anymore. Capitalism, dragged
into a new crisis, and this process is seeking to escape from neo-liberalism under the name of
laisser-faire philosophy will revive. Advanced capitalist countries, particularly to developing
countries recognized by these currents (Moneterist Ideas and New Classical School),
capitalist growth model for countries re-opened the front.
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Table 2. Mean Growth Rates (%)
1960s
1970s
1980s
1990s
Rich Countries
4,7
3,1
2,3
2,2
Participants
1,4
2,9
3,5
5,0
2,4
3,3
0,8
1,4
Emerging Countries
Participants
Non-
Emerging Countries
Source: World Bank Trade, Growth, and Poverty, David Dollar and Aart Kraay
Capitalist system, the crisis conditions to recover the theories emerging "new" and "original",
not industrial capitalism emerged since the first period when necessary "new identities" who
offered the old things (Başkaya;1997, p.296).
Table 3;the governments of tax revenue they collect the lavish use has been shown to. The
main idea of people belonging to another table and do not have to give back to spend a
comfortable income, is a rational logic can not act. Notice that it is our own money we will
use rational for ourselves, someone else will for our tight-fisted, somebody else's money will
be owed a refund for our still need to use rational is claimed. After 1960 this relationship we
started to be interested in ideas of economist Milton Friedman has shown. Therefore After
1960 was vehemently opposed to government intervention in economic thought. Demand
side policies in the economy of the re-supply will be essential to return to the way policy of
the country's economy to grow rapidly again, and already scarce resources that has lead to the
excessive use again.
Table 3. Extravagance relationship
Monetarist sight
Your own money
Someone else money
For yourself
A
B
Rational
Borrower (Rational)
C
D
Stingy
State
Else for
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3. Definitions and Contents
Are now known events reinterpretation, on one side of the developed countries, on the other
side there are countries that are trying to develop. Developed countries 17 the end of the
century, until today, the production had a very intense, especially from the 1980s until 1900,
all the resources ruthlessly seized and are beginning to consume. To identify the location of
all energy sources, and these areas had less developed countries, they find the new terms
used in these countries do not have to do all they can. Mentioned before, this point source is
the process of change. Ie "the emergence of a new term obligation" that the concept of
Sustainable Development, and the one Offshoring (Outsourcing) express the concept.
Different definitions of sustainable development have been made. A description in terms of
economic instruments "in the best way of scarce resources management" can be shaped. To
maintain the quality of our natural resources and services based on "economic development,
we maximize net benefits" can be interpreted as also. (T.C.S.V;1989) Another definition that
"future generations of resources from lower-income use of" can. But the most common and
general definition published in 1987 and briefly called the World Commission on
Environment and Development Brundtland Commission's definition is to be made. Report,
the concept of "future generations to meet their own needs without endangering able to meet
the needs of today's generations of development" is defined as. If we look at the details, the
developing countries of the developed countries do not make mistakes and sensitive to the
environment of these countries to use the techniques of production requirements, attention is
the concept, especially in developing countries, emphasis is made.
Offshoring is the concept, as well as activities of the firms manufacturing or partially taken
out of the country and moved to the production process is continued in the country. Globally,
Offshoring few examples of applications, known as the Nike company, no longer produced
shoes only product design and marketing in the U.S. portion to be doing, yet the famous S &
M (Sweden) textile company manufacturing process of a portion of Uzbekistan to be doing,
Nokia (Finland) of the battery company and plastic production to China can give to scroll.
Table emerging countries 4.de of direct foreign capital flows between 1973 and 1998 are able
to see the increase.
Table 4. Direct Foreign Capital Flows to Developing Countries in
Terms& Regions
1973–76
1977–82
1983–89
1990–93
1998
Africa
1,1
0,8
1,1
1,4
5
Asia
1,3
2,7
5,2
19,8
65
1,0
2,5
2,6
1,6
25
Latin America
2,2
5,3
4,4
11,0
70
Total
3,7
11,2
13,3
34,2
165
Middle East and
Eastern Europe
Source: 1998 Business Week data, November 2000.
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Environmental threats requires the process of change in the economy. A period of two
similar models of the capitalist economic model, again unlike the socialist model of
production processes, products which are necessary for developing countries that supply raw
materials to begin the migration process is partially or completely. On the same samples
continued to explain that we, in Uzbekistan's cotton is produced in that region living for
citizens, reducing unemployment, industrialization process, opening to the outside, the
welfare level such as increasing with some elements for the first time how the production can
be made into finished products are described to convert. Because environmental costs in the
production process for the country no longer buys raw materials is too much. Someone else's
country to a less polluting means the environmental costs.
New dimension is the inspection of the table 4.de extravagance; your own country and
protective measures taken for the production of rational, while in another country to do for
your production could say you can be extravagant.
Table 4. Change (developed countries)
Own Country
Someone
else'scountry
DomesticProduction
Production Abroad
A
B
Rational
Rational
C
D
Protective
Extravagant
The production process where the raw material but can not be performed by the domestic
industry to foreign investment in these countries can withdraw their name by making every
sacrifice is entering into competition with each other. To shift production to these countries
constitutes a great opportunity for developed countries. Foreign direct investment, so
between the raw material resources to provide, produce the different activities of a single
administration under the assembly, production-related can not be transferred to information,
business secrets and names preserve the importer country's imposed tariffs and quotas and
transportation costs to avoid domestic restrictions (environmental protection standards, etc.)
to escape , to provide flexibility in production, transportation and information technology and
cheaper foreign production factor (labor, natural resources, etc.), there are factors such as
usage (Seyidoglu, 2001). For example, the European Union countries with the most growth
in the case of the Finnish environmental sustainability index consistently has ranked first, this
is the biggest reason for almost the entire production process, developing countries are being
shifted.
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Table 5. Environmental Sustainability Index
Countries
2002
2005
Finland
1. order
1. order
Norway
2. order
2. order
Sweden
3. order
4. order
Canada
4. order
6. order
Switzerland
5. order
7. order
USA
45. order
45. order
Turkey
62. order
91. order
UK
91. order
65. order
142 Countries
146 Countries
Total
Source: E., Kalder, Environmental Specialist Group, Istanbul, 2004.
Examples of production in foreign countries, we can model has many brands. Developing
countries who live in this brand has been growing by learning the privilege to be able wear.
However, even the manufacturing is done in our own country, although the reasons are still
owners of famous brands in the welfare level of the center of the firms in the country are
trying to understand that the increase in living up to.
In terms of supply chain management experience And now that try to summarize recent
developments. Supply Chain Management; business process which is necessary for the
production of raw materials to supply, inventory control and distribution of providing the
most effective way to ensure understanding of management is developed. In this process
companies to find the most suitable raw material, be able to control him and his opponent for
the big effort will keep one for companies. Now these two great countries of identifying and
then the United States and China, as well as a collection of companies in the EU for a
moment let's consider and analysis carried out by one company let. Only companies, in
addition to the supply of the countries we consider not only production for consumption
purposes also neglected to discuss what they consider not. As known, the United States, 20
March 2003 a military intervention in Iraq has done.
Over the past six years, although the exact cause of the movement still is not known. In fact,
the main reason for the U.S. to the region it is only available in this region may be oil? Or so
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
at first by just for show, and everyone can be accepted, there is already a priority for
development was that? To investigate the actual causes of intervention than before in the
history of military intervention and the main reason to go there to search for the source as
needed, will be more meaningful for the future of the region.
U.S. today the only country in foreign trade surplus of China has been unable to. U.S.
imports from China since 1994 have increased by 400%, and the situation of the United
States against imports was 13%. United States and their trade volume of China's 343 billion
dollars. China, U.S. products exported 287.5 billion dollars, while U.S. exports to China of
the total 55.2 billion dollars. In this case, approximately 233 billion U.S. dollar against the
trade deficit is emerging. No application will prevent the rise of China is known,
unfortunately all the economic measures (quotas, customs duties, quantity restrictions,
standards, etc.). Is not found within. In this case, the back remains only one way to do that, it
is to take control of China's raw material resources. China's oil imports in 2005 is around 127
tons. China's total oil consumption is up 317 million tons. China in the world with this value
is the second largest oil consumer. China is more important for close to half of this oil was
imported, in other words, except for China's energy needs is that the dependent. The
availability of oil supplies are African countries (Cameroon, Liberia, Sudan, Zambia,
Namibia, Mozambique, Seychelles). But this is not easy for China to work with suppliers.
The first is to bring oil from African countries, in addition to already high oil prices and a
high transport costs that will not load and increases the cost of production conducted in
China. However, energy costs in a region much closer to the supply of which is already
cheaper than the costs of production decline will recognize the opportunity. The second of
these countries the supply of oil to be used during the Malacca Strait to China's oil route road
map represents a key point of the throat and this too risky and take place in an unstable
region of China provides worry about in terms of supply. Indeed, Malaysia and Indonesia
have problems between them, constitute the two sides of the throat. U.S. to Indonesia, his
proximity, they are likely going to China will cause the oil path is in jeopardy. Because of
this danger new and more secure energy supplier for China is required. As a third reason that
the oil supply in Africa in the process of entering the United States and the intense
competition is increasing much more than passing day. Africa currently the world's most
needy areas of development, in the case.
This situation of the developed countries of this region for the development of the capital
increases will put out. However, the development process, albeit less completed states
existing suppliers, while intense competition occur and require large capital to a region that
in that region in the future much more uncertain, is likely is striving to China's long-term
strategic plan is forcing. Elimination of these three cases and to find new suppliers of priority
issues for China represents.
China's best strategy ever increasing for the production and in the future will need much
more than the supply of Russian energy resources, Kazakhstan, Kyrgyzstan, Uzbekistan and
Tajikistan (the Shanghai Cooperation Organization-SCO) and within the framework of an
agreement with Central Asian countries will have to shift.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
According to predictions of future U.S. scientists, the Central Asian republics and Turkey in
this region have rich energy resources of the world's dominant power is said to be mean. This
is really the first move to their destinations as the U.S. source for the control of the targeted
region and the region have entered Iraq, now Iran has increased over the statements. Later the
connection between China and Russia are targets completely break OATC 'dir. He does
control the region's energy resources to China and even the EU countries would mean the
control of energy resources.
Aware of these developments in terms of regional countries to act fairly is important. So, the
EU countries are following the China-Russia close to how the healing?
The EU's 2004 and 2007 have been built in the last enlargement If we are to look at all
except one of the Baltic countries (Estonia, Lithuania, Latvia), Czech Republic, Poland,
Slovakia, Slovenia, Malta, Hungary, Bulgaria and Romania have been. EU to expand the
boundaries of this region has created a sense of border security. A second reason is that the
free movement of capital within the framework of the manufacturing process in a more
comfortable position and efforts that are rich in natural resources, this region is to move. To
be aware if some of these countries in the EU Maastricht Treaty criteria required that all the
qualities that we did not move. But were still in alliance are. In a similar situation for Turkey
will be able to. U.S. accelerates and mobility in the region threatening the EU enlargement
policy that if a new movement should be expected. EU enlargement policy, the last with the
union to include Turkey, the only limit is open in the region also will want to ensure all.
Because in the process of full integration is thought to be most needed for the EU countries,
central Turkey's army will be. Turkey, as usual for this situation constitutes both a threat and
an opportunity. Because the above assumptions we can better manage the negotiation process
in case of no validity without the need for union members could be compromised. However,
a possible result of the wrong foreign policy monitoring, which will warm up much more
unity in the region from falling into a country that protects only limits to our cause. Turkey's
foreign policy will follow a more rational and sustainable without compromise. Our supply
chain processes in a more rational policy followed by the European Union needed to provide
control of energy resources is possible.
Indeed, in 2002, the Nabucco pipeline project, launched by Turkey in the framework of
supply chain management control of the process of procurement has been included.
Unfortunately, uncertainties and occurring against Iran OATC'nde attitudes (embargo) to
start the project delays. The Nabucco pipeline is a major investment project realization will
allow to find new suppliers of the EU and Russia, offers an alternative way to break the
monopolistic power.
The European Union is one of the biggest disadvantages of a stand-alone rather than deal
with Russia, or can not gain control of each country hold their own initiative within the
framework of the request, for example, Germany's agreement with Russia also make or
Bulgaria, Hungary's verbatim to enter into separate negotiations with Russia, so perhaps
there may be much higher prices for natural gas contracts will be canceled.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
We need to be careful with this external dynamic that has an internal dynamics. European
Union's own within a monotony, no consensus. Radical approach in themselves are fighting
each other. Especially Germany and France in the European Union are trying to increase his
share in the energy market and each country in a sense, their "energy champion" is trying to
create. For example, in France it is an indicator of recent merger events (Bagdadioglu, 2008).
Conclusion
Unfortunately we live in the environment is not passing day. However, because developing
countries' development efforts, but so far they are doing in their own countries, and today
with new concepts emerging mass-production activities in countries showing the capitalist
model are powerful multinational companies. Underdeveloped or developing societies of
developed countries in any period of history, none have lived up to the environment has not
betrayed. There are currently spending millions of dollars in developed countries for the
environment if they only reason that can be experienced in the depths of space could not find
another planet not yet come forward. Developing the concept of community as presented to
us in the bottom of the facts need to see who is lying.
More detailed analysis of these concepts need to discuss and without fear. However,
developing countries as a whole could make already delayed as we follow the west at the
center of the topics (information) printed on the articles, books and reports to make
translations and is transferred to the masses. Actually, we need to do the opposite ideas on
these issues is a manufacturer of these ideas and thoughts to be discussed with the wider
academic circles as to ensure as soon as possible should be passed on to future generations.
Our country and other developing countries that their future depends on how sensitive are
these shape.
Bibliography
Bagdadioglu, N. (2008). Competition Terms protection Mı?, AB An Evaluation in the
Context of Energy Reform, Hacettepe University, Thursday Conferences, Ankara.
Başkaya, F. (1997). Paradigmanın İflası, 6.Baskı, Dose Publications.
Başkaya, F. (1999). Neoliberalism Dark Balance Sheet, New Turkey Journal, JanuaryFebruary, I.5.
Bremond, J. and Geledan, A. (1984) Dictionary of Economic and Social Concepts, Istanbul,
Remzi Publications.
Kolodko, G.W. (2000). Globalization and Catching-Up: From Recession to Growth in
Transition Economies, IMF Working Paper, WP/00/100/ IMF washington D.C.
Seyidoglu, H. (2001).Uluslararası Finans, 3.Press, Guzem Publications, Istanbul.
Talas, C. (1999). Economic Systems, Ankara: S. Publications.
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T.C.S.V. (1989), Our Shared Future, Second edition, Ankara.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Said Yousif KHAIRI
Faculty of Agriculture
Alfateh University, Libya
[email protected]
Ragib Mansour ELWERFELI
Faculty of Agriculture
Alfateh University, Libya
Khaled ELBEYDI
Faculty of Agriculture
Alfateh University, Libya
ESTIMATING THE DEMAND FOR MONEY IN LIBYA USING
AUTOREGRESSIVE DISTRIBUTED LAG (ARDL)
Abstract
This paper examines the long-run demand for money of Libya using the unrestricted error
correction model (UECM) and the bound test (pesaran, shin & smith 2001) to determine if
the demand for money is cointegrated with real income, exchange rate prior to the
cointegration analysis. The study used annual data from 1975 to 2007. The bounds test
revealed that the demand for money is cointegrated with its determinates at the 5% level of
significance. Thus, the long –run demand for money was found to be stable. In addition, the
CUSUM test confirms the stability of the money demand function.
Keywords: Money demand, co integration, ARDL.
1. Introduction
The empirical investigation of the demand for money in Libya has received little attention. A
small number of studies were conducted on the demand for money in Libya. The purpose of
this paper is to estimate the demand for money in Libya during the period (1975/2007) using
econometrics technique, namely Autoregressive Distributed lag (ARDL) to cointegration.
Many of the previous studies did not find strong evidence that all variables in the system
have the same order of integration. Therefore to solve this problem in this paper we employ
ARDL approach to co integration, a relatively recent econometric technique developed by
pesaran et al (2001) to estimate the long-run relationship among variables. The outline of this
paper is as follow: Section 2 provides the explanation on theoretical framework. In section 3,
we present the empirical analysis. In particular, the estimation model, methodology process.
And the estimation result. Finally, in section 4, some conclusions are drawn.
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2. Theoretical framework
Based on the conventional macroeconomic framework, the money demand function is
assumed to take the following form:
(M\P)=F (RGDP, EXR, Ut) → (1)
Where M represented money demand; P is domestic price level; RGDP is real gross domestic
product; EXR is the exchange rate (number of unit of domestic currency per us dollar), and U
is error term.
In this study we estimate money demand equation using the log- linear forms. The
cointegration relationship for the money demand equation is estimated using the bounds test,
which is based on the following unrestricted error correction model (UECM):
n
n
n
i =0
i =0
i =0
ΔLN ( RM t ) = A0 + ∑ A1 ΔLNRM t −1 + ∑ A2 ΔLNRGDPt −1 + ∑ A3 ΔLNEXRt −1
+ λ1 LNRM t −1 + λ 2 LNRGDPt −1 + λ3 LNEXRt −1 + U t → (2)
Where ΔLN(RMt) , ΔLN(RGDPt) , Δ LN(REXt) , are the first difference of the logarithms of
real money demand , real gross domestic product , the exchange rate.
Before testing the model, we present a brief discussion of the ARDL approach to
cointegration. As mentioned in pesaran and pesaran (1997), there are two steps for
implementing the ARDL approach to cointegration procedure.
First, we test the existence of the long-run relationship between the variables in the system.
In particular the null hypothesis of having no co integration or long-run relationship among
variables in the system, (H0: λ1=λ2=λ3=λ4=0), is tested against the alternative hypothesis H1:
λ1≠λ2≠λ3≠λ4≠0) by judging from the non standard F- statistics. Since the distribution of this
F- statistics is non-standard irrespective of whether the variables in the system are I(0) or I(1)
, we use the critical values of the F- statistics provided in pesaran and pesaran (1997) and
pesaran et al (2001) . In there , there are two sets of critical values , when all variables are
I(0) or I(1) the two sets provide the band covering all the possible classification of the
variables into I(0) or I(1) ,or even fractionally integrated ones . If the computed F- statistics is
higher than the appropriate upper bound of the critical value, the null hypothesis of no
integration is rejected; if it is below the appropriate lower bound, the null hypothesis can not
be rejected, and if it lies within the lower and upper bonds, the result is inconclusive.
Secondly, after the existence of the cointegration between variables is confirmed, the lag
orders of the variables are chosen using Akaike Information Criteria (AIC). After the lag
order is selected, the error correction representation and log-run model are estimated. Then,
the stability tests, namely Cumulative Sum Recursive Residuals (CUSUM) test are
conducted.
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3. Estimation results
Following the processes of the analysis methodology, by using the microfit 4.1 (oxford
university press) for computation, the estimation results are presented as follow. In the first
step, the computed F- statistics is (5.62) that found to exceed the bounds upper critical value
of (4.85) at 5% significance level. This implies that money demand and its determinants are
cointegrated. In the second step, we estimate the equation (2) and select the lag orders of the
variables in the system based on (AIC).
Table 1: provides the results of the lag order selection of the variables, which is ARDL, and
the results of diagnostic tests of the short run model. In table 2: all the estimated coefficients
have the expected signs statistically significant at 5%. From the result of adjusted coefficient
−2
of determination ( R =0.95009) it is clear that over all goodness of fits of the estimated
equations is very high. Moreover the diagnostic test results indicate that the short-run model
passes all of the serial correlation, functional form, and heteroscedasticity tests, the model is
well specified without any problem of serial correlation and heteroscedasticity. Therefore, we
can argue that the estimated short-run model performs well. Table 2 provides the result of the
error correction representation of estimated ARDL model. The result indicates that the error
correction term ECT (-1) has the right sign (negative) and is statistically significant.
Particularly, the estimated value of ECT (-1) is (-0.57), implying that the speed of adjustment
to the long-run equilibrium in response to disequilibrium caused by the short-run shocks of
the previous period is 57%. To test the stability of the model, in this paper we employ the test
of CUSUM test. From the figure1, it is obvious the plot of CUSUM is within 5% of critical
bands. This implies that the estimated model is stable over the study period.
Conclusion
In this paper, the demand for money in Libya has been estimated using Autoregressive
Distributed lag (ARDL) approach to cointegration analysis of pesaran et al (2001). The
(ARDL) method does not generally require knowledge of the order of integration of
variables. In this paper, we found that the income elasticity and exchange rate coefficient are
positive. This indicates that depreciation of domestic currency increases the demand for
money. Our results suggest that long-run equilibrium relationship exists between money
demand and real gross domestic product, and exchange rate. The error correction term is
strongly significant with the right sign (negative); this means that there is cointegration
relationship (long-run relationship) among variables of estimated model. Our results also
after incorporating the CUSUM test reveal that the M2 money demand function is stable
between 1975and 2007.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
References
Asteriou. D. and Hall, S.G. (2007). Applied Econometrics. NewYork: Pal Grave Macmillan.
Central Bank of Libya, Annual Reports, Various issues.
Chowdhury, A.R. (1995). “The Demand for Money in a small open Economy: The case of
Switzerland ", Open economics review, vol.6, no.2, (April), pp.131-144.
Civcir, I. and Parilh, A. (1998), "An Error Correction Approach to Modelling money
Balances and Reserves", Journal of Economic Studies, vol.25, no.4, pp.277-295.
Friedman, (1959). "The Demand for Money: Some theoretical and Empirical Results”
Journal of Political Economy. (August), pp.327-351.
Pesaran, M.H. & Pesaran, B. (1997). Working with Microfit 4.0: Interactive econometric
analysis, United Kingdom: Oxford University Press.
Pesaran, H., Shin, Y. & Smith, R.J. (1996). Testing for the existence of a long-run
relationship. Unpublished manuscript. Department of applied economics, working paper, no.
9622, University of Cambridge.
Pesaran, H., Shin, Y., & Smith, R.J. (2000). Bounds Testing Approaches to the Analysis of
Level Relationship. Journal of Applied Econometrics.16.
Table 1: (ARDL) coefficient of the money demand equation
Regressor
Intercept
Lm2(-1)
LRGDP
LEXR
Dependent variable is lm2
coefficient
T- ratio[probe]
2.64
3.04 [0.005]
0.428
2.5 [0.018]
0.223
3.3 [0.002]
0.155
3.04 [0.005]
Note: figures in parentheses denote the significant level,
all variables expressed in logarithm form.
Diagnostic Tests
R-Squared = .95508 R-Bar-Squared = .95009
F-statistics
= 191.3449[.000]
Serial Correlation F-statistics
= 1.7294 [.200]
Functional Form F-statistics
= 1.5400 [.221]
Normality
CHSQ ( 2)
= 1.2149[.545]
Heteroscedasticity F-statistics
= 1.2379[.349]
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Table 2: Error Correction Representation for Money Demand Equation.
Dependent variables DLM2
Regressor
coefficient
T- ratio [probe]
Intercept
2.64
3.04 [0.005]
DLRGDP
0.223
3.34[0.002]
DLEXR
0.156
3.8[0.001]
ECT(-1)
-0.57
-3. 4[0.002]
List of additional temporary variables create:
dLM2 = LM2-LM2(-1) , dLRGDP = LRGDP-LRGDP(-1) , dLEXR = LEXR-LEXR(-1)
ECM = LM2 -.39075*LRGDP -.27274*LEXR -4.6212*C
Figure 1: CUSUM Stability Test
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Babar Zaheer BUTT
Foundation University, Pakistan
[email protected]
Kashif ur REHMAN
Iqra University, Pakistan
[email protected]
M Iqbal SAIF
Department Management Sciences,
Foundation University, Pakistan
[email protected]
Nadeem SAFWAN
Foundation University, Pakistan
[email protected]
CUSTOMERS’ CREDIT CARD SELECTION CRITERIA IN PERSPECTIVE
OF AN EMERGING MARKET
Abstract
The credit card market has expanded radically in Pakistan, both in terms of cards variety and
usage. A wide variety of local and international cards is available in the market issued by
different domestic and foreign banks. Despite of recent financial crisis still huge potential for
future growth and further penetration exists in Pakistan. The purpose of this study is to
explore and investigate various attributes that customers consider of importance while
selecting a credit card in Pakistan. The sample of this study was 800 credit cardholders. The
information was collected from existing cardholders through a self-administered
questionnaire. It contained questions related to credit card market, cardholder's profile and
the relative importance of the main attributes that play a role in card selection. The data
collected then analyzed to find out the important factors that influence the credit card
selection. The results show that convenient and economical use both local and abroad and
sense of security are important attributes that customers consider while selecting a credit
card. The findings of this study can be helpful for financial institutions to focus on the
features, which customers consider important while selecting credit cards and can be used for
optimal marketing mix allocations in prevailing economic situation in the country.
Keywords: Credit card, Important Attributes, Cardholder's Profile.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
1. Introduction
Access to information, globalization and changing role of regulatory authorities have
increased the level of awareness of the general public, business community, and various
stakeholders about the financial markets and their performance. It is worth mentioning here
that the privatization exercise has also helped in creating public awareness and stimulating
investment in the financial market. A number of factors has impacted positively on the
growth of the financial market especially advancement in information technology, which has
brought the world much closer together with expeditious and significant cross border
movement of goods, capital and labor.
For a little over a decade now, the Pakistani banking sector has been undergoing a profound
transformation. The future of the industry is likely to be earmarked by increasing
competition, further consolidation and continued growth in consumer financing. Burgeoning
non-performing loan portfolios, antiquated infrastructure and poor customer service had
created a dire need, during recent years, to reform the nationalized commercial banks. Thus,
in order to resolve these problems the government initiated a flurry of activity on the
privatization front, whereby it offloaded its interests in a number of banks. Privatization of
nationalized banks, as well as the establishment of separate private banks, is likely to
continue to give the sector a more shareholder base, and hence more efficient, orientation.
Individual banks will thus need to rely on better planning, increased operating efficiency and
improved customer service to survive, let alone thrive, in such an environment. This process
has already led to a marked increase in competition and hence efficiency in the sector over
the last few years.
For last few years the share of consumer financing in overall banking financing has increased
quite substantially in Pakistan. Credit card is one of the most rapidly growing areas of
consumer financing and aggressively marketed by the banks. Numerous credit cards are
available to the customers issued by the national (both private and public banks) and foreign
banks. Credit cards can be very useful as they facilitate convenient access to money for a
variety of everyday activities. It is important, however, to discipline and optimize credit card
spending to avoid any financial difficulty.
2. The Pakistani Credit Card Market
The Pakistani card market has recently expanded dramatically both in terms of credit cards
and of card usage (Credit card loans were outstanding Rs. 33,538 million (US$ 560 M) at end
of June 2006, Rs. 42,822 million (US$ 700 M) June2007 and Rs. 45,689 million US$ 740 M)
at the end of Apr 2008 approx). A wide variety of cards is available in the market issued by
number of private and public banks. Plastic Money business is going big time in Pakistan. In
a country where few years back people have hardly heard the word credit card, it has been
estimated that there are likely to be around 5 million potential card users in the near future.
This forecasting derives credibility from the fact that more and more local and international
financial institutions are exhibiting enthusiasm in this direction. This in turn reflects
prospects in Pakistan market in accommodating number of credit card competitors operating
on the circuit, ensuring healthy and competitive card business deals. Although most of the
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
banks have achieved a certain number of customers based on their reputation and position in
the target market, still a huge potential for further penetration exists. The expansion in the
credit card market is based on many factors including privatization of nationalized banks,
establishment of private banks, introduction of advance technology and friendly regulatory
environment. ATMs are a revolution in the Pakistani banking sector and banks are promoting
their cards by connecting them with ATMs and it is proving an additional advantage towards
credit card marketing. Banks are relying on heavy advertisement through electronic and print
media by using various slogans targeting the welfare and prestige of their potential customers
to differentiate their products from the competitors.
Though the cardholders are increasing everyday due to strong marketing campaign by the
banks still a large part of the market is unexplored and un-served especially in small cities
and rural areas. Majority of the credit cardholders belongs to large cities and very few from
remote areas. Both customers and banks are responsible for this situation. The banks are
paying less attention to this unexploited market and people are not fully aware and also
frighten to use such complicated source of credit according to their perception. There are
number of factors behind this perception including inappropriate pursuance by the banks.
The history of credit card in Pakistan was started when Habib Bank introduced its gold card,
but people had hardly known about this card because of its very limited issuance. Foreign
banks especially the Citi Bank have done a tremendous job in educating people of Pakistan
and financial industry about credit card and its importance for modern day business.
Following are the credit cards largely issued by various banks in Pakistan. Master Card-One
of the most widely acceptable cards in the world carrying features like financial flexibility,
economy, security and of course prestige offered by various banks in Pakistan with almost
similar features. The well established Master Card issuer banks are Standard Chartered Bank,
Allied Bank, National Bank, HSBC Bank, Citibank, ABN- AMRO, Askari Bank, Bank
Alfalah and Bank Al-Habib. Visa Card-One of the most growing and popular credit cards in
Pakistani market having common features like cash advance, shopping, discounts and
promotions and many more offered by many banks including United Bank, Habib Bank,
Standard Chartered, Citibank, National Bank, MCB Bank and Bank Alfalah with brands like
Green, Golden and Classic etc. American Express- One of the most established credit cards
in the world both in terms of credibility and usage with various features like unmatched
power, prestige, financial flexibility, convenience in use and economy etc. American Express
has very narrow customer base in Pakistan as compared to Master and Visa due to its limited
availability as only few banks offered it like Standard Chartered Bank and Union Bank.
Although banks are using extensive marketing strategies to expand their customer base in
credit card, still a large population is not using this source of credit even in literate urban
areas. Therefore the objective of this study is to analyze various attributes of credit cards that
customers consider important while selecting a credit card especially in current difficult
economic conditions. These factors are convenience of use, source of prestige, sense of
security, economy and worldwide acceptability further explained by various items.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
3. Literature Review
Since the time of its inception in 1950s credit card market has grown remarkably (Durkin and
Price, 2000). Credit has been an attractive instrument for the general public as well as for the
business community that facilitate them in their financial obligations. It is not only helping
them to discharge their liabilities, also provide them a leverage in their financial resources by
providing various benefits like enhanced credit limit, payment in installment, cash advance,
promotions and discounts, acceptance at reputable and modern establishments, protection and
insurance etc. Credit card market has also provided a new dimension for business
researchers; they are always keen to know why people use credit cards and the number is
increasing everyday, what driving force behind this decision and what are different features
of credit cards that influence them while selecting a particular card. Many of these questions
have been explored and answered by the researchers related to developed part of the world
and a lot of literature on credit cards usage available but very limited published research is
available on Pakistani credit card market.
Kinsey (1981) conducted a study on credit card determinants and found that high income is
the most contributing factor in increasing the number of credit cards. A study focusing on
credit card usage behavior was conducted in America and Canada by Kaynak and Ugur
(1984) and they found that people consider credit card as a useful product and presume it
more secure than cash. Kaynak (1986) and Laroche et al. (1986) conducted studies on
selection criteria for banking services and found that convenience in using banking services
at more locations and hours of operations are the most important factors while selecting
banking services. Canner and Cyrnak (1986) supported the results of these studies and
established that one of the major reasons of using credit card was the convenience of use
which was positively related with income, age and financial position of the cardholders. Lunt
(1992) found that enhanced credit limit, low interest rates and fair charges are noticeable
factor for a credit card selection. One of the significant studies conducted on credit card
selection criteria by Meidans and Devos (1994) on Greece credit card market and they
suggested that the convenience of use in local and international market, safety and economy
were the dominant factors that influence customers' decision while selecting a credit card.
Many studies determined that with an increase in education level and customer awareness
about the credit card, its usage frequency enhanced (Barker and Sekerkaya, 1992, Kaynak et
al., 1995). Chan (1997) conducted a study on Hong Kong credit market and found that long
interest free repayment period and low annual fee were the most important factor for
selection and use of credit card. Worthington (1998) recognized that credit cards were
providing excellent opportunities and facilitating banks in the distribution and delivery of a
wide range of financial services.
Lee and Hogarthe (2000) showed that consumers preferred to have credit cards that
convenient to use and have no annual fee and other encroachments. Durkin (2000) observed
that consumers used credit card not just as alternate to cash and cheques, they also considered
it as a revolving credit and preferred to use credit cards with more credit limit. Kaynak and
Harcar (2001) argued that ease of use is the most vital feature for credit card use along with
large acceptability and access to cash. Meidans and Devos credit card selection criteria
developed for Greece market was replicated by Maysami and Williams (2002) in Singapore
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
credit card market and they found that the convenience of use and level of acceptability in
both domestic and international market were the most important factors of card selection.
Gan and Maysami (2006) examined the credit card selection criteria among Singapore
cardholders using ANOVA and Factor Analysis and the results of the study revealed that the
convenience of use, protection, economies and flexibility were the most important factors
and reputation was the least important factor in determining the credit card selection.
Moreover they also concluded that there were considerable differences among the
respondents with respect to card preferences with in demographic variables like gender, age
educational level and income groups. However, credit card selection criteria among
Singaporeans were not much different from other developing/developed nations. Devlin and
Worthington (2007) carried out a study on main and subsidiary credit card holding and
spending and suggested that banks should market their credit cards with superior discounts,
promotions and other features than their competitors which will help them to increase the
number of customers.
4. Method
Data
Credit card selection needs to be done very carefully before applying for a credit card. Many
factors have to consider at the time of credit card selection. The most common features
offered by companies need to be weighed against the overall cost of owning a credit card.
The objective of the study is to find out the importance of various features that customers
consider important while selecting a credit card. A questionnaire consisted of 15 items
adapted from the study of Meidan and Devos (1994), further divided into 5 major attributes
that influence customers' choice of credit card. The questionnaire was an effort to identify the
importance attached to each attribute by the customers for credit card selection, measured on
a 5-point Likert scale anchored by “least important”-1, “less important”-2, “important”-3,
“much important”-4, “very much important”-5. Before carrying out the analysis, reliability of
the instrument was determined and the Cronbach's Alpha was .781. The target population for
this study was the existing credit cardholders living in different parts of the country. To make
the sample more representative data was collected from some major cities of Pakistan as
most of the cardholders belong to this heavily populated urban area. The sample of the study
consisted of 800 credit cardholders from the cities of Rawalpindi, Islamabad, Lahore,
Faisalabad and Karachi. The questionnaire was distributed conveniently among 1,200 credit
card holders out of which 890 were returned and only 800 completed in all aspects were
included in the study for analysis.
Procedure
The data collected through questionnaire was analyzed using the same procedure mentioned
in the studies of Meidan and Devos (1994) and Gan and Maysami (2006). However items in
the questionnaire were adjusted according to the features offered by the domestic credit card
market. Moreover demographic questions were also added according to the local conditions.
Mean scores of each attribute was calculated along with their relative importance to find out
the importance of each attribute and importance of each major variable of selection criteria,
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Table-1 (Where the sum of relative importance of all items is equal to 1). Factor Analysis
was also carried to measure the contribution and importance of each attribute and some of the
most important features of credit card selection criteria as Factor Analysis help out to
differentiate between contributing and non contributing factors in terms of their importance
to overall criteria (Table-II). The relative importance of each variable was calculated by
dividing the mean score of each item with the sum of the means of all 15 items, e.g.
A1 =
A1
A1+A2----+A5+B1---+B3+C1--+C3+D1--+D3+E1
The relative importance of each main attribute was calculated by adding the relative importance of
sub items of these attributes e.g. A= A1+A2+A3+A4+A5
5. Results And Discussion
The results of the study reveal the demographic characteristics of the credit cardholders in
Pakistan along with their importance given to each attribute that can influence their choice of
credit card selection. It is evident from the results that 83% of credit cardholders are male
and 17% are female which is quite expected keeping in mind the socio economic conditions
of the country where the male gender is dominating part of the working force and they are
the main users of credit cards. On the other hand respondents belong to different professions
including business, private and public sector, almost 90% of them having income more than
Rs. 20,000. About 91% of respondents having age above 25 years and only 7% of them
having 10-years of schooling whereas approximately 74% having education level Graduation
or higher.
[Insert Table 1&2]
ANOVA and Independent Sample T-Test are applied to find out any significant difference
among various groups of respondents with respect to their demographic characteristics like
gender, age, income and education. No significant differences are found between the genders
and among various level of education of the respondents in terms of importance attached to
15 attributes of selection criteria. However people of different age and income groups' exhibit
significant differences relating to some of the factors like large acceptance in Pakistan,
installment facility, acceptance at modern establishments, supplementary cards, protection
when the card is lost/stolen, world wide service availability, discount and promotions /low
service charges, no joining/annual fee and large acceptance abroad. These results show that
at different age and income levels people have different perspectives and their consideration
for a particular attribute can change with the increase in age and income.
[Insert Table 3&4]
Tables 3 and 4 illustrate the results of cardholders' consideration of importance given to each
attribute of selection criteria that influence their choice at the time of selecting a credit card.
This importance is explained in terms of mean scores, relative importance and factors
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
loading. The results are suggesting that five components together are responsible for around
77% variance in the data. The results of individual attributes are showing that in terms of
mean scores and relative importance the most important attributes are (1) Large Acceptance
in Pakistan (2) Enhanced Credit Limit (3) Installment Facility and (4) Large Acceptance
Abroad where as the least important attribute is Status Symbol. The results are also analyzed
on the basis of five main variables of credit card selection criteria and they are exhibiting the
following pattern of importance.
A. Convenience of Use (36% of Importance): As credit card is becoming very hard to
differentiate financial product so banks are facilitating their customers in card utilization by
opening more branches, acceptance at other banks and organizations, repayment in
installments, enhanced credit limit and cash advances to get the competitive advantage. This
is also helping them to increase the number of credit cardholders. The results are supporting
their efforts as the convenience of use is having 36% importance of credit card selection
criteria with high factor loading. It also suggests that how influential this feature to credit
card selection. B. Indication of Prestige (18% of Importance): This attribute is consisted of
items like acceptance at modern and reputed high class establishments, supplementary cards
and status symbol which indicate the prestige attached to the product. However this image
has declined over the period of time due to increase in a number of credit cards and
cardholders, also credit card is becoming more of a common product. The Indication of
Prestige has an importance of 18% in credit card selection criteria with heavy loading but
less as compared to the convenience of use. Moreover these credit cards with different
features to somewhat are issued by various banks with different image and reputation among
the customers that also reflect in the image of these credit cards. Credit cards issue by the
banks like Citibank, Standards Chartered, MCB bank and Bank Alfalah are carrying better
image than cards offered by some nationalized banks.
C. Sense of Security (20% of Importance): This variable is explained by factors like
Protection when the Card is Lost, Provision of Insurance and Worldwide Services
Availability. It gives a sense of security and safety to customers for card utilization in terms
of operation and financial aspects at the time of the transaction and later payment of bills.
This attribute has an importance of 20% in credit card section criteria with a heavy factor
loading. D. Economy (19% of Importance): This is an important attribute especially in the
arena of high inflation and strict financial limitations. People are interested to buy the cards
with less charges and more economical usage. Most of the credit cards these days offered by
the banks in Pakistan carrying such features like No Deposit/Account, Discount and
Promotions and No Annual or Joining fee making it more common attribute of every credit
card. Still the most imperative area of concern for the customers and banks in present
intricate economic conditions with the relative importance of 19% and high factor loading. E.
Shopping Abroad (7% of Importance): This factor consists of only one item i.e. Large
Acceptance Abroad with 7% of importance and high factor loading in credit card selection. It
is one of the most important attributes in terms of mean score and relative importance so
people want to use which is largely acceptable abroad. Due to globalization, faster and
enhance access to information and increasing trend in foreign purchase making this feature
more important in credit card selection. Banks are also aware of this situation advertising it
as an important part of their package.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
From the results it is also evident that Visa and Master cards are the most growing cards in
Pakistani market due to their large acceptability and economical utilization. Moreover these
cards are offered by the banks with large branch network and established reputation. The
results of this study are similar to some previous studies conducted on credit card selection
criteria. Kaynak (1986), Meidan and Devos (1994), Lee and Hogarthe (2000), Durkin (2000),
Kaynak and Harkar (2001), Maysami and Williams (2002) and Gan and Maysami (2006)
also found that the convenience of use in national and international market, protection and
economy were the most important factors for credit card selection.
Conclusions and Recommendations
This study focuses on one of the important product of financial sector facing stiff competition
both in terms of variety and usage. Companies are following aggressive marketing
campaigns to attract customers by highlighting various features of their product with very
little room for differentiation. This study intends to find out the importance of various factors
in credit card selection. Results demonstrate the mean scores and relative importance of each
attribute of credit card selection criteria alongwith their factor loadings. From the results it
can be concluded that Convenience of use is the most important factors that customers
consider important while selecting a credit card. Sense of Security, Economy and
Acceptability abroad are other essential and important areas for cardholders. Though
Indication of Prestige variable has been decreasing over the period of time but still it is
having a noticeable importance according to the credit cardholders.
The attributes when compared on an individual basis, presenting a very clear picture about
the customers' proclivity, though they have given contemplation to almost all 15 attributes
but it can easily be deducted that large acceptance in Pakistan, enhanced credit limit,
installment facility and large acceptance abroad are the most important factors and status
symbol is the least important factor of the credit card selection criteria. These results also
indicate a change in customers mind and advancement towards marketing growth and
stability in Pakistan. Though cardholders have concerns about the prestige, security and
economical features of the credit cards but they are more inclined towards the operation
ability and acceptability of their instrument. They are ready to give preference to those credit
cards which can be used and acceptable anywhere in domestic and international market with
appropriate security and reasonable economy.
Keeping in view the above conclusions drawn from the results, it is suggested that banks
should be more innovative and proactive in their offerings to gain the competitive edge in
this sheer pace changing environment. They have to introduce such perceptible features to
attract the customers towards this barely differentiable product. They should extend their
network and relations with other stakeholders to enhance the utilization and acceptability of
their cards as existing and potential customers are more engrossed in it. Banks should
develop an appropriate marketing mix to promote credit cards by highlighting the prominent
attributes unlike to existing product and from their competitors. Most importantly they have
to realize their potential customers how essential and beneficial these new features for them.
Last but not the least banks should remain on their toes to be flexible and innovative in
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
offering new incentives, attractive features and economical utilization of their product to
intact their existing customers and to magnetize the potential ones.
References
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Developing Economy”, International Journal of Bank Marketing, Vol. 10, No. 6, pp. 27-31.
Canner, G.B. and Cyernak, W.A. (1986), “Determinants of Consumer Credit Card Usage
Patterns”, Journal of Retail Banking, Vol. 8, No. 1, pp. 9-18.
Chan, R.Y. (1997), “Demographic and Attitudinal Differences between Active and Inactive
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Devlin, F. J. and Worthington, S. (2007), “An Analysis of Main and Subsidiary Credit Card
Holding and Spending”, International Journal of Bank Marketing, Vol. 25, No. 2, pp. 89-101
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Kaynak, E. (1986), “How to Measure Your Bank’s Personality: Some Insights from Canada”,
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Laroche, M., Rosenblast, J.A. and Manning, T. (1986), “Services Used and Factors
Considered Important in Selecting a Bank”, International Journal of Bank Marketing, Vol. 4
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Lee, J. and Hogarthe, M.J. (2000), “Relationships among Information Search Activities
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Table I: Significant Findings of the ANOVA by Income Group in Pakistan
Factors for Card
Selection
Acceptance in Modern
Establishments
Supplementary Cards
Worldwide Travel
Services Available
Mean Scores
FValue
PValue
1000020000
3.0870
2100030000
3.4032
3100040000
3.0552
4100050000
3.0535
>50000
2.8299
4.004
.003
3.0435
3.4677
3.0414
3.0145
2.7823
5.736
.000
3.4348
3.2016
2.9517
3.3551
3.1088
2.562
.038
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Table 2: Significant Findings of the ANOVA by Age Group in Pakistan
Factors for Card Selection
Mean Scores
FValue
36-45
46-55
PValue
16-25
26-35
>55
Large Acceptance in Pakistan
3.3000
3.8988 3.9086 3.6216
3.6731
3.343
.010
Installment Facility
3.1000
3.7440 3.7716 3.5676
3.5673
2.572
.037
Supplementary Cards
2.3000
3.0238 3.0203 3.0360
3.3654
3.832
.004
Protection When the Card is
Lost/Stolen
Discount and Promotions
/Less Service Charges
No Joining or Annual Fee
2.7500
3.4702 3.0812 3.0631
3.3750
3.629
.006
2.5000
3.3155 3.3553 3.0721
2.8750
4.824
.001
2.6000
3.3631 3.4619 3.2613
3.0962
3.199
.013
Large Acceptance Abroad
2.8500
3.6548 3.6954 3.3964
3.3462
3.997
.003
Table 3: Mean Scores and Relative Importance of 15 Attributes
Selection Criteria-Factors
Mean Scores
Relative
Importance
A: Convenience of Use in Pakistan
A1: Large Acceptance in Pakistan
A2: Enhanced Credit Limit
A3: Installment Facility
A4: Acceptance Anywhere
A5: Cash Advance/Balance Transfer Facility
3.7917
3.5750
3.6683
3.3550
3.2900
0.076499
0.072127
0.07401
0.067689
0.066377
.3567
B: Indication of Prestige
B1: Acceptance in Modern Establishments
B2: Supplementary Cards
B3: Status Symbol
3.0717
3.0600
2.8133
0.061973
0.061737
0.05676
.18047
C: Sense of Security
C1: Protection when the card is lost/stolen
C2: Provision of insurance
C3: Worldwide travel services available
3.2267
3.3267
3.1717
0.0651
0.067118
0.063991
.196209
D: Economy Variables
D1: No deposit/Account
D2: Discount and Promotions/Low Service Charges
3.1900
3.1800
0.06436
0.064158
D3: No joining or annual fee
3.3050
0.06668
.195198
E: Shopping Abroad
E1: Large acceptance abroad
3.5400
356
0.071421
What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Table 4: Attributes Loadings and Factors Relative Importance
Factors for Card Selection
Convenience
of Use
Large Acceptance in Pakistan
Enhanced Credit Limit
.878
.799
Installment Facility
.784
Acceptance Anywhere
.793
Cash Advance/Balance
Transfer Facility
Acceptance in Modern
Establishments
Supplementary Cards
.817
Indication
of Prestige
Sense of Economy Shopping
Security
Abroad
.700
.774
Status Symbol
.676
Protection when the Card is
Lost/Stolen
Provision of Insurance
.633
Worldwide Travel Services
Available
No deposit/Account
.792
.706
.740
Discount and Promotions /Low
Service Charges
No Joining or Annual Fee
.802
.862
Large Acceptance Abroad
.839
Eigenvalue
4.342
2.445
2.102
1.481
1.225
Percentage of Variance
28.948
16.303
14.013
9.874
8.167
Cumulative % of Variance
28.948
45.250
59.263
69.137
77.305
36
18
20
19
7
Factor Relative Importance (%)
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Renata PROKEINOVA
Faculty of Economics and Management
Slovak University of Agriculture, Slovakia
[email protected]
SWOT ANALYSIS OF HOMO ECONOMICUS THROUGH
GLOBAL FINANCIAL CRISIS
Abstract
SWOT Analysis is a strategic planning method used to evaluate the Strengths, Weaknesses,
Opportunities, and Threats involved in a project or in a business venture. It involves
specifying the objective of the business venture or project and identifying the internal and
external factors that are favorable and unfavorable to achieving that objective. However, we
apply SWOT analysis to the identify Strengths, Weaknesses, Opportunities, and Threats of
Homo Economicus, who has specific behavior during Global Financial Crisis. There are
many aspects, which cause consumptions behavior pattern. Paper doesn’t provide complete
scale possibilities, but on the other side shows on different social class in Slovakia and their
response on Global Financial Crisis.
Keywords: SWOT analysis, Income, Households.
1. Introduction
Aim of this paper is discuss about behavior of consumers, who are comprehended such a
Homo Economicus. Considerations are mostly scholastic and subjective from the view point
of evaluator. Firstly, we would like to describe concept of Homo Economicus or Economic
human.
Some economic theories of humans are presented as rational and broadly self-interested
actors who have the ability to make judgments towards their subjectively defined ends.
Economists tend to disagree with these critiques, arguing that it may be relevant to analyze
the consequences of enlightened egoism just as it may be worthwhile to consider altruistic or
social behavior. Others argue that we need to understand the consequences of such narrowminded greed even if only a small percentage of the population embraces such motives.
However, economists' supply and demand predictions might obtain even if only a significant
minority of market participants act like Homo Economicus. In this view, the assumption of
Homo Economicus can and should be simply a preliminary step on the road to a more
sophisticated model.
Defenders of the Homo Economicus model see many critics of the dominant school as using
a straw-man technique. For example, it is common for critics to argue that real people do not
have cost-less access to infinite information and an innate ability to instantly process it.
However, in advanced-level theoretical economics, scholars have found ways of addressing
these problems, modifying models enough to more realistically depict real-life decisionmaking. For example, models of individual behavior under bounded rationality and of people
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
suffering from envy can be found in the literature. It is primarily when targeting the limiting
assumptions made in constructing undergraduate models that the criticisms listed above are
valid. These criticisms are especially valid to the extent that the professor asserts that the
simplifying assumptions are true and/or uses them in a propagandistic way.
2. Methodology
The SWOT analysis is an extremely useful tool for understanding and decision-making for
all sorts of situations in business and organizations. SWOT is an acronym for Strengths,
Weaknesses, Opportunities, and Threats. Information about the origins and inventors of
SWOT analysis is below. The SWOT analysis headings provide a good framework for
reviewing strategy, position and direction of a company or business proposition, or any other
idea. Completing a SWOT analysis is very simple, and is a good subject for workshop
sessions. SWOT analysis also works well in brainstorming meetings. Use SWOT analysis for
business planning, strategic planning, competitor evaluation, marketing, business and product
development and research reports. You can also use SWOT analysis exercises for team
building games. See also PEST analysis, which measures a business's market and potential
according to external factors; Political, Economic, Social and Technological. It is often
helpful to complete a PEST analysis prior to a SWOT analysis. See also Porter's Five Forces
model, which is used to analyze competitive position.
A SWOT analysis is a subjective assessment of data which is organized by the SWOT format
into a logical order that helps understanding, presentation, discussion and decision-making.
The four dimensions are a useful extension of a basic two heading list of pro's and con's (free
pro's and con's template here).
SWOT analysis can be used for all sorts of decision-making, and the SWOT template enables
proactive thinking, rather than relying on habitual or instinctive reactions. The SWOT
analysis template is normally presented as a grid, comprising four sections, one for each of
the SWOT headings: Strengths, Weaknesses, Opportunities, and Threats. The free SWOT
template below includes sample questions, whose answers are inserted into the relevant
section of the SWOT grid. The questions are examples, or discussion points, and obviously
can be altered depending on the subject of the SWOT analysis. Note that many of the SWOT
questions are also talking points for other headings - use them as you find most helpful, and
make up your own to suit the issue being analyzed. It is important to clearly identify the
subject of a SWOT analysis, because analysis is a perspective of one thing, be it a company,
a product, a proposition, and idea, a method, or option, etc. Be sure to describe the subject for
the SWOT analysis clearly so that people contribute to the analysis, and those seeing the
finished SWOT analysis, properly understand the purpose of the SWOT assessment and
implications.
3. Discussion
Household is considered such a very important issue in economics, which consist of one or
more economics subjects – Homo economics’. We will try to describe thinking of different
households. However, we have three groups of households, which are typical in Slovakia.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Single households consist of followed people:
• one adult younger than 64 years,
• one adult older than 65 years
• single parent with dependent children
• single female
• single male
Households with two adults include:
• two adults younger than 65 years
• two adults at least one aged 65 years and over
• two adults with one dependent children
• two adults with two dependent children
• two adults with three or more dependent children
Chart 1 Disponsible income in euro of household
1200
1075,48
971,42
1000
999,30
839,87
800
597,06
600
400
639,88
385,71
200
0
single
household
two adults
two adults at single parent two adults with two adults with two adults with
younger than least one aged with dependent one dependent two dependent three or more
65 years
65 years and
children
children
children
dependent
over
children
Total disponsible income of household
Source: www.statistics.sk (online 29.09.2009)
We analyzed three social classes, which were divided according to average income on
household. As you can see in chart 1, society in Slovakia is separated into households
according to number of children. We can take a notice, that single household has lower
disponsible income than households with adolescents. Lowest disponsible income is
represented households with one adult and one child. Initiate situations is caused income and
gender inequality. Mostly, there are woman represents household with one adult with one
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
child. Someone’s are divorced, someone’s are widows. It is not easy to foster child with one
lower income.
Followed, we tried to analyze SWOT analysis from the view point of each social class,
represented concrete type of household. Analyzed issue related to impact behavior of
households on the global financial crisis. If they feel financial threat, so people begin to think
about their reserve, savings, which are needed for their families.
Firstly, we analyzed single households. Singles are typical Homo Economicus, who follow
own targets. They have many hobbies and spent more money- that is the positive aspect of
solution financial crisis.
Table 1 SWOT analysis of Single household
Strengths
Weaknesses
None children.
Only one income.
Low income.
Social unstable system.
Opportunities
One full time job and
simultaneously part
time job.
New better job.
Threats
Unemployment
Serious medical
condition
However, single households are danger social class similarly such other classes. There exists
threat of unemployment, which is more difficult for single households than for other
households. In the final consequence financial crisis causes many areas of life and to
consider about it from the one side is shortsightedly.
Table 2 SWOT analysis of Household with one adult and one child
Strengths
Weaknesses
Family relations.
Only one income.
Social fees.
Low income.
Social unstable system.
Opportunities
One full time job and
simultaneously part
time job.
Threats
Unemployment.
Serious medical
condition.
Table 2 is focused on households represented one adult with one child. That type of
household is common in the contemporary society. Equally, in that social class, there are
similar threats of unemployment and serious medical conditions. In spite of social fees for
these households, it is not sufficient help for their situation.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Table 3 SWOT analysis of Household with two adults and more children
Strengths
Weaknesses
Two high incomes.
Two low income.
Social fees.
Social unstable system.
Opportunities
New better job.
One can find part time
job.
Threats
Unemployment.
Serious medical
condition.
Last social class is presented of household with two adults (parents) and two and more
children. There are increasing expenditures for more children, but on the other in this family
may be two incomes. Financial crisis cause on this family followed: decreasing expenditure,
saving, help from next member of family. In SWOT analysis, part Opportunities is initiated
“One can find part time job”, but through financial crisis is not likely.
Conclusion
Finally, we can observe, that strengths side of households is income, which is depends of job
and salary. If people don’t have job and appropriate salary, so they have problems with
common expenditures related to family and children. Singles spent more money and they are
better fighter again financial crisis, than families with two or more children.
However, each social class has similar threats: unemployment and serious medical condition.
In the final consequence financial crisis causes many areas of life and to consider about it
from the one side is shortsightedly.
References
Bielik, Peter. (2001). SWOT analysis of Slovak farmers in the pre-accession period to the EU
= SWOT analýza slovenských farmárov pred ich vstupom do EÚ In: Agricultural economics.
Praha : Česká akademie zemědělských věd : Slovenská akadémia pôdohospodárskych vied :
Ústav zemědělských a potravinářských informací, 2001-. ISSN 0139-570X. Roč. 49, č. 8
(2003), pp. 352-356.
SWOT analysis. On the web site:
http://www.businessballs.com/swotanalysisfreetemplate.htm (online 29.09.2009)
Wójcik-Augustyniak, Marzena. (2000). SWOT - analysis as a helpful instrument of
management. In: Medzinárodné vedecké dni 2000 : Sekcie: Podnikový manažment : Agrárny
marketing : I. diel : Zborník vedeckých prác. Nitra : Slovenská poľnohospodárska univerzita,
2000. ISBN 80-7137-715-5. pp. 79-83.
Disponsible income of household. On the web site: www.statistics.sk (online 29.09.2009)
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Viju MATHEW
College of Applied Science
MOHE, Sultanate of Oman
[email protected]
GLOBAL FINANCIAL CRISES:
IMPACT AND RESPONSES FROM INDIA
Abstract
Economists and financial experts are looking to put forward various theories and assessment
for which financial crises has occurred and find means to prevent and solve the regular
occurrence in coming years. Asian economies are not much exposed and largely do not have
direct risk to its assets and lending. Indirectly, the impact of the financial crises on growth
has split over Asian market in one or the other form. India being a relative closed economy
and differs in various norms as of West which has turned indirect impact of the global
financial crises. India has addressed the global financial crises taking highly proactive
measure in its monetary and fiscal policy reducing the intensity of financial crises impact.
This paper will highlight various impacts of financial crises and responsive measure taken
from India which has reduced the impact.
Keywords: Financial Crises, India, Impact and response.
1. Introduction
With the start of the financial crises in advanced economies which has lead to the loss of
confidence in the financial system and assets causing the sharp downturn in all sector. The
financial crisis has made an impact turn to a collapse of much financial institution drying the
credit, questioning the financial policies and strategies of the system. the financial crises has
its impact on both developed and developing economies dominating its presence in
manufacturing, real estate and other industries throughout the world, followed by the crash of
stock market and currency crises in some.
Economists and financial experts are looking to put forward various theories and assessment
for which financial crises has occurred and find means to prevent and solve the regular
occurrence in coming years. The US financial crisis has been explained with the countries
sub-prime mortgage market lending in terms of loans with happens to be weaker. The lenders
have insufficient financial resources to get bank which leads to high level of defaults. The
banks were laying huge bets with each other over loans, assets and other issues. Various
complex transaction have turned into high risk causing severe slide in value of assets, With
the collapses of the Lehman Brothers low confidence continue to be deepen and further
deepen the credit crunch in the US financial market. The major failure happens due to the
fact 1) managing risk and allocating capital. The activity being adopted in the financial
system has been turned to risk and highly suppressed the growth which made the economies
to rethink and do serious structured improvement in the system.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
2. Significance of Financial Crises on India
India being one of the largest developing economy moving forward is facing major
challenges and seen its worst time with the outbreak of global financial crises. The industrial
sector followed by the real estate and other has been affected of all times. With the fall of
stock price, inflow of capital, reducing foreign reserve, tightening domestic liquidity has
been the major affected in the recent financial turmoil. Consequently, export and domestic
demand largely remain silent as compared to past. Other sector like housing, IT, Construction
etc has been greatly hit by the US financial crises tsunami. Sharp fall in the export and
manufacturing sector with the consequently, downturn made the citizen jobless by the end of
2008. It has been estimated that the sharp fall in GDP growth and export as compared to
2008 and expected to further fall this year, 2009.
Indian stock market: Indian stock market has been experienced worst after the panic followed
the collapse of major banking institution in US and Europe. Great turbulence has gone into
the Indian stock market with the global financial scenario dipping at its lowest. The foreign
investor has started rethinking causing major worry for Indian market.
Information technology sector: with the down turn of the stock market the IT sector has seen
major crunch, low in their price. IT majors has not been able to enhance the business with
investors inside and major outsider adopted the retrenchment at mass. Apart from the
financial crises affecting major IT companies, resulting turnover and created a fear for
survival. Result of the turmoil at individual feared job security and great turnover at different
level.
Banking: With the failure of the big banks in US has given negative impact on developing
countries. The developing countries are rethinking on extended contamination of sub-prime
mortgages, holding assets and causing greater concern on credit available. The ongoing
financial crises affected the Indian banking system being invested in derivatives exposed to
risk and subsequently under scan.
Real estate: the sector has been affected by the financial crises as reparation of credit crunch
from bank. Many large construction projects have been delayed and some stopped due to
backup investment banking leading to slump in real estate with downturn graph in the sector.
Export: the export sector has getting dip in foreign orders from its two large markets of US
and Europe. It has been estimated to be 70% fall in Indian export (Madhuri Malhotra, 2008).
The major export sector composes of handicrafts, textiles, leather, engineering goods etc.
which is largely affected. The depreciation of rupee against US dollar also leads to an
increase in the rupee realization of the export earnings. Engineering goods exports are
expected to grow marginally lower than 2007-2008 i.e. less expected to hit by the slow down.
Export sector like textiles will likely to have mixed input. Specialized production like yarn,
readymade garments not seen growth and getting lesser order. the agro, steel, tea, steel and
also in the line to be affected. International Monetary fund (IMF) expects the growth in world
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
trade to decline from 9.4% in 2006 to 2.1% in 2009 due to the combination of various factors
like reduction in demand and pricing.
3. Exposure to Asian Economies
Asian economies are not much exposed and largely do not have direct risk to its assets and
lending. Although the economies has transmitted some impact of the slowdown in the growth
rate due to the financial crises which can be seen in massive reversal of capital flow, decline
trade volume, decreasing demand in industrial output, lower remittance, increasing demand
on domestic investment, larger growth of unemployment, real estate downturn, stoppage of
major development projects, fall of stock price and other indicators. Indirectly, the impact of
the financial crises on growth has split over Asian market in one or the other form.
4. Impact of Financial crises on India
India faces two ways repercussion based on financial crises which include: Economic and
Social impact.
Economic Impact
1. Indian Economic growth declined to more than 7% in 2008 which is about 2% less
than 2007. The adverse effect of the trade losses have subsequently slowed down the
economic growth affecting deep macroeconomic equilibrium and increasing pressure
on domestic initiatives.
2. Resulting on the financial credit crunch affecting economic downturn directly
affected job market rising unemployment and downward reversal to the income.
Furthermore, the growth in the small and micro enterprises has been deeply hit.
3. Adverse effects on capital flow from FDI's as been reverted to domestic contracting
the economic growth.
4. Reduce stock price and flow of capital form the foreign investors affecting the
inflation in the recent times.
5. The global financial downturn resulting in other parts of the world reverse migration
to India has been increased in which Southern part of the country has been affected
with unemployment.
6. With the start of the collapse of major banking and financial institution around the
world affected the credibility of banks and other institutions in the market. The
unavailability of credit in the banks also leads to loss of confidence and questions the
banking system itself especially transacting from the outside financial institution.
7. The value of share in terms of stock prices falls making a bubble which needs time
and techniques to burst for providing the bridge for economic growth. The stock of
real estate falls in value resulting losses.
8. The reserve immigration has reduced the inflow of capital through remittance. The
foreign reserve is shrinking with time which directly affects the economy. Reduction
on export order also has great impact on economic downturn which has directly
affecting in last quarter of the previous year and start of this year.
9. Foreign direct impact on the specific sector like IT has deepened the economic
impact.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
10. Corporate to rely relatively more on domestic sources of financing for which the
investment is short for the projects.
Social impact
1. With the economic impact on the financial crises emerging unemployment has lead to
poverty, increase in domestic demand etc. the reverse immigration has extended high
demand in goods and services with the increase in price of various goods and
shortage of services.
There is already a indication of financial crises in IT and export sector report of
downsizing and other measures of cost cutting. Large number of other sector firms
implies significant drops of new hiring and along with retrenching the existing that
makes in change more complex and imbalance in the job market as a consequence
affect reduced household income/ wages in both urban and rural market.
2. Project based on development, millennium goals, rural development etc has been
severely affected with the delayed process and sometimes extended o terminating the
projects. More than half of the overall investment in social services and development
like planned highways other infrastructural projects including transportation facilities
etc could be delayed. Government budgets face hard constraints as the results of
economics slowdown.
In review, the impact can be highlighted as:
•
•
•
•
•
•
•
•
•
•
•
•
•
Corporate to rely relatively more on domestic sources of financing
Domestic investment is largely financed by domestic savings
Domestic primary capital market issuances have suffered
Downside risks from these international developments
External commercial borrowings of the corporate sector declined
Foreign institutional investors (FIIs) witnessed a net outflow
Potential reversal of capital flows on a sustained medium-term basis
Predominant domestic financing of investment
Projected slow down of the economy
Simultaneous effects on the domestic forex market and liquidity conditions
Slow stock market conditions
Total net capital flows fall in April-June 2008
Volatility in portfolio flows felt in the equity market
Nevertheless, India is considered as a relative closed economy and differs in various norms
as of West which has turned indirect impact of the global financial crises. Impact of the
present global financial crises is not limited mainly to urban and suburban areas extended to
tourism, outsourcing as closely integrated to international market which has been deeply
affected. Integration of Indian financial sector other than the FDI is more based on domestic
investment rather than external which also reduce the direct impact of the global financial
crises. Also social planned development need government spending rather than foreign
investment or it lies beyond stimulus package.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
5. India's Response to Global Financial Crisis
The Government of India has addressed the global financial crises taking highly proactive
measure in its monetary and fiscal policy reducing the intensity of financial crises impact.
Reserve Bank has also successively imposed additional prudential measures in respect of
exposures. The measures to stabiles the financial sector, available of liquidity and
maintaining the demand is considered to be primary concern. The RBI has taken measure to
keep domestic money and market functioning normally and checked liquidity in exchange.
Banks were directed to formulate specific policies covering exposure limits, sanctioning
authority/level to be financed. With respect to the rapid increase in real estate sector raising,
risk on bank exposure was increased. Other than this, tightening of regulation and
supervision of Non-banking Financial Companies (NBFCs) and excessive leverage in this
sector has been restricted. Various policy package (Duvvuri Subberae, 2009) has been
announced as:
1.
2.
3.
4.
5.
6.
7.
8.
Reduction of policy interest rates
Expanded and liberalized refinance facilities for export quantities
Upward adjustment of the interest rate ailing on foreign remittance
Relaxing external borrowing
Allowing non banking financial companies for borrowing
Rupee dollar swap facilities for Indian banks
Refinance window for special purpose vehicle
expanded lend able resources to credit to SME's and export
Financial Stimulus
The emergency provision under FRBM Act targeting fiscal relaxation launched two fiscal
stimulus packages. The fiscal stimulus package includes: public spending, capital
expenditure, infrastructure spending, and cut in taxes, credit to micro and small enterprises,
rural development, waiver package and stimulating demand.
According to the Prime Minister, Dr. Manmohan Singh speech on Oct. 20, 2008, Indian
Banking system is not directly exposed to sub-prime mortgage assets. Both public sector and
private sector banks have low risk, well capitalized and financially sound. With the shrink in
the external commercial borrowing overall credit availability has reduced. Various steps to
overcome the problem:
RBI cut Cash Reserve Ratio
The SLR (Statutory Liquidity Ratio) remain loosen.
Window enabling bank to draw funds to provide liquidity
Debt wavier and debt relief schemes
RBI cit the Rapo Ratio (100 basis point)
Increase borrowing ratio
RBI and government has make certain the flow of credit ensuring liquidity in the
market
8. Supporting banks by lower Capital Adequacy Ratio
1.
2.
3.
4.
5.
6.
7.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
9. Committee for assuring global financial impact and to make recommendation
10. Monitoring closely stock market and dealing with fluctuation.
Outlook
The basic outlook of financial crises arranged from developed countries following the
consequences to developing countries at different stages and level is seen very carefully. The
major outlook emerges as developed economies financial crises are based on financial sector
to non financial or real sector. But in developing, it may be reverse or differently. The
countries have turned the policies respond to match the country needs based on responding to
timing, sector, and implementation. Developed economies emphasis on the revival of the
financial sector while Asian economies addresses on other indirect impact of the crises like
export, outsourcing etc. India, on the need basis developed the policy to emphasis on
economic growth and improving demand.
Conclusion
The India has addressed the global financial crises taking highly proactive measure in its
monetary and fiscal policy reducing the intensity of financial crises impact. The reserve Bank
of India has taken various measures to ensure continuous support to the industrial sector
maintaining liquidity and cash flow in the market. The paper highlights the features of global
financial crises affecting India being a developing country and the consequence on the
growth. The India's response to address the crises has been very positive which has reduced
the impact. This paper clearly highlights the developmental measures which have been taken
by India for deal with the financial crises.
References
Duvvuri Subbarao (2009). Impact of the global financial crisis on India – collateral damage
and response Speech by Dr Duvvuri Subbarao, Governor of the Reserve Bank of India, at
the Symposium on “The Global Economic Crisis and Challenges for the Asian Economy in a
Changing World” organized by the Institute for International Monetary Affairs, Tokyo, 18
February 2009.
http://www.brookings.edu/opinions/2008/1002_financial_crisis_bryant.aspx
http://www.business-standard.com
http://www.cmie.com
http://www.hinduonnet.com/2008/09/16/stories/2008091656401600.htm
http://www.newstrackindia.com/newsdetails/29681
Madhuri Malhotra (2008). Financial Crises: A Cascading Effect on India website: accessed
on 15 April, 2009
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Rakesh Mohan (2008), Global Financial Crisis and Key Risks: Impact on India and Asia
Deputy Governor Reserve Bank of India Remarks prepared for IMF-FSF High-Level
Meeting on the Recent Financial Turmoil and Policy Responses at Washington D.C. October
9, 2008
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GUO Yue
Jiangxi Vocational College of Finance & Economics
Wuhan University of Technology, China
[email protected]
YANG Qing
School of Management
Wuhan University of Technology, China
[email protected]
SUSTAINABILITY OF FINANCE ADVANTAGE TO ACHIEVE COMPANY
COMPETITIVE STRATEGY UNDER THE FINANCIAL CRISIS: HAIER AS A
CASE STUDY
Abstract
Terms such as the competitive strategy, finance advantage and finance crisis have been used
over the past decade to describe the changing global competitive environment(Thompson et.
al, 2004, pp.26-36; Ghobadian et. al, 2004, pp.15-18; Porter, 2006). Evaluation company
finance performance have been used to enable firms to gain sustainable competitive
advantage, with varying degrees of success (Petty et. al, 2008, pp.211-215). Yet we remain in
uncertainly finance crisis with strategic preparation for the future becoming a critical activity.
Here we try to learn case from Haier how to sustainability of finance advantage, which will
provides some idea for academics and practitioners with a highly focused approach to
competing in the global marketplace.
Keywords: Competitive Strategy, Finance Advantage, Haier.
1. Introduction
The financial crisis of 2007–2009 has been called the most serious financial crisis since the
Great Depression by leading economists, with its global effects characterized by the failure
of key businesses, declines in consumer wealth estimated in the trillions of U.S. dollars,
substantial financial commitments incurred by governments, and a significant decline in
economic activity. Many causes have been proposed, with varying weight assigned by
experts. The term financial crisis is applied broadly to a variety of situations in which some
financial institutions or assets suddenly lose a large part of their value (WTO Job Net). Yet
we remain in uncertainly finance crisis with strategic preparation for the future becoming a
critical activity. Here we try to learn case from Haier, so we must know how to sustainability
of finance advantage and what had happened from this manufacturing company case study,
and try to find out how keeping company competitive strategy under the financial crisis.
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2. Background of Haier Company
Haier is the fourth biggest home appliance producer in the world. The brand Haier is one of
the most valuable Chinese brands. Through 24 years (1984 until now) struggle, Haier
becomes the first Chinese multinational enterprise. “Until 2007, the Haier group has
established 64 trading companies (19 overseas), 29 manufacturing plants (24 overseas), 8
design centres (5 overseas) and 16 industrial parks (4 overseas)1. ” There are over 50,000
employees through the world. Sales 2008 was RMB 30.41 billion (3.15 billion Euros2). 2008
Haier took 26.2% of home appliance market share in China, especially high-tech area and
white home appliance industry Haier took over 30% market shares.
The branding strategy makes Haier go to the global market in advanced of other Chinese
competitors. Since 2005, Haier was a multinational company with “19 categories of
products”, including refrigeration, air conditions, washing machines, television, water
heaters, personal computers, mobile phones, and kitchen appliances. All of them have been
rated as top brands in China. Especially the core business refrigerators and washing machines
are the main source of revenue every year.
Haier group consist of one parent company (Qingdao Haier Co.) listed on Shanghai exchange
and two main subsidies, Haier Electronics Group Co. Ltd. listed on Hong Kong exchange
and Haier America. Hong Kong is one of the most mature international finance markets in
the world. Haier went to that market because of its global strategy. Haier wants to enlarge its
business by using that international stage which has more open, more transparent, and more
liquid capital environment. Since 1999 April 30 Haier entered into the US market. Haier tried
twice to list in that market but both of them were not successful. The financial strategy is
clear that Haier can choose borrowing money from multi-financial markets, meanwhile
increasing its reputation in global market. It sounds good, but the real situation is not the
same.
News coming from Bloomberg on the day March 18 2009 said “China plans to pay 15 billion
yuan ($2.2 billion) in subsidies for home appliance purchase in rural areas this year to spur
100 billion yuan in additional demand.” Qingdao Haier Co. is one of the biggest winners in
this plan. In the end of 2008, Haier products are recognised as high-tech products by Chinese
government. It will provide many priorities (like tax) for the company’s development. Haier
group shows some state-owned character even it is a private company. Haier Electronics
Group Co., Ltd. (Stock code: 01169) is a wholly owned subsidiary of Haier Group, which is
listed on the main Board of the Stock Exchange of Hong Kong Limited. Since 2000, Haier
Group started to enter into Hong Kong China (the much more mature financial market) to
implement its global strategy for finding out more space to develop. Two joint venture
companies (cooperated between Haier Group and CCT Telecom Holding Limited) named
Pegasus Telecom (Qingdao) and Pegasus Telecom (Hong Kong) has been established in
Qingdao and Hong Kong respectively.
1
2
Introduction to the Haier Group , http://www.haier.com/AboutHaier/HaierWorldwide/haier.asp.
with the exchange rate 1Euro=9.659 RMB which is the exchange rate on the 31st December 2008.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
2001 CCT Telecom has injected its 41% stake of Pegasus Qingdao and 51% stake of Pegasus
Hong Kong into the company Haier-CCT Holdings Limited (2005 the company’s name has
changed into Haier Electronics), meanwhile Haier Group has injected 49% of Pegasus
Qingdao into the same company. After transferring stocks within the group Haier Electronics
was fully owned subsidiary of Haier Group. For the next 4 years Haier Group continues to
inject Pegasus Qingdao stock and sell its business to “Haier Electronics”. Until December
2006 “Haier Electronics” completed the acquisition of washing machine business and water
heater business from Haier Group. Here stated to calculate NPV of the two businesses in
Haier Electronics from that year.(as Chart 1)
Pegasus Qingdao
CC
T
49
Pegasus Hong Kong
CC
T
51%
Hai
er
51
Haie
r
49%
Chart 1: Pegasus Telecom in two places
(Source: Haier Group.)
3. Literature Review
Firms that are in a strong financial position can respond authoritatively to new opportunities,
weather environmental threats, and withstand pressure from stakeholders, as compared to
competitors who suffer financial constraints. Analyzing financial reports and statements
requires a fundamental understanding of where numbers come from, how they are organized
and presented, what they mean, what they measure, and how they are used.
3.1. Financial analysis and company financial performance
There are many theoretical sources covering financial analysis available both in English and
in Chinese. The first part of bibliographical sources of the thesis consists of hard-copy
materials and the most deserved attention books are reviewed below. The “Financial
analysis: tools and techniques. A guide for managers” by Erich A. Helfert (2001, pp.1-485)
describes a system approach to financial analysis, helps to interpret financial statements and
shows every technique and measure. Another book – “Financial management and analysis”
by Fabozzi and Peterson (2003,pp.1-10) deals with principles and tools of financial analysis
around the globe. Its authors also contribute to understanding of financial statement analysis,
which includes analysis of financial ratios, evaluation of earnings and cash flow analysis. A
very good approach to accounting and statement analysis could be found in “Financial
statement analysis: a practitioner's guide” by Fridson and Alvarez (2002, pp.105-115).
On the real life examples, the authors illustrate the financial statement analysis. A great selfstudy book “Financial analysis with Microsoft Excel” by Mayes and Shark (2006, pp.1-476)
integrates financial performance with spreadsheet analysis using Excel. It helps to create a
template for making financial analysis faster and convenient. Another part of the used
bibliography includes the Internet sources such as web pages and online articles.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Foundations of accounting practices of China are based on the state financial policy, which is
governed by the Ministry of Finance of China. For this reason, the law and subordinate
regulatory acts determine them. Because of their rapid change, the Internet is the only
provider of actual legislative data for the thesis.
3.2. Financial analysis and Competitive advantage
Having a competitive advantage usually means that the firm can perform a service,
manufacture a product, or offer a bundle of benefits that competitors cannot match
(Porter,1985). While it is extremely difficult to sustain a competitive advantage, especially in
the electric and electronic industry, firms work to create advantages through differential
development of resources and capabilities. Superior resources or capabilities are those that
have value in the market, are possessed by only a small number of firms, and are not easy to
substitute. If a particular resource is also costly or impossible to imitate, then the competitive
advantage may be sustainable. Porter and Millar (1985, pp.149-160), states that a business is
profitable if the value it creates exceeds the cost of performing its value activities. In order to
gain a competitive edge over rivals or in a fierce market, a company must either perform
these activities at a lower cost or perform them in a way that leads to differentiation and a
higher business value. Michael Porter (1985, pp.11-15) work on competitive strategy
suggests that organisations should re-evaluate their value chain and concentrate on the
operations that they can do best. Other processes should ‘out-sourced’ to specialists. There
are four main areas of support activities: procurement, technology development (including
R&D), human resource management, and infrastructure (systems for planning, finance,
quality, information management etc.).
According to a study by Deloitte Consulting some reports, in which they conducted
interviews with 230 managers in 85 global companies. It revealed that benefits of financial
system on organizations are categorized into two types namely; ‘tangible’ and ‘intangible’
benefits. The tangible benefits include cost savings when it comes to human resources and
inventory reduction, productivity improvements and faster processing. Davenport, Harris
and Cantrell (2002, pp.16-26) , go on further stating that competitive advantage in
organizations is apparent when adopting an financial system in terms of better management
decision-making, cost-savings in headcount reduction, more efficient and faster transactions
and thus cycle time reduction. Also, improved customer service and retention and improved
financial management (Seddon, 2005, pp.283).
4. Analyses And Finding
4.1. Revenue
The growth rate of revenue in Haier Electronics keeps high growing speed. Even in 2008 the
turbulent financial crisis period it also has 33.5% growth rate. (as Table1)The main reason
for the high growth rate comes from the positive policy given by Chinese government which
is used to enlarge the consumption capacity internally and pick up the confidence of
consumers. Such like the policy “Rural Area Subsidized Electrical Appliances Purchase
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Policy” gives great impetus for Haier’s development. 80% of population in rural area gives
unlimited potential market to home appliance makers. Haier is the biggest winner.
Table 1: The growth rate of revenue in Haier Electronics
HK$ million
2006
2007
2008
2009E
2010E
2011E
2012E
Sales
6,901
8,549
11,409
14,832
19,281
24,102
28,922
Growth rate
24.5%
23.9%
33.5%
30%
30%
25%
20%
Source: Haier company
Additionally the subsidiary of high-tech. products also given by the government will help
Haier to eat the market of front loading washing machine which is usually hold by foreign
competitors like BSH. The target of market share for front loading washing machine in China
is 50% announced by Haier Group. Based on the positive factor in Chinese market, here we
chose 30% as growth rate for next 2 years. From 2011 to 2012 the market is assumed to
achieve saturation. The growth rate will be slow down a bit into 25%.
4.2 EBITDA3
Forecasting of EBITDA is based on the percentage of revenue. From 2006 to 2008, the
percentage of revenue was 2.8%, 3.6%, and 1.6% respectively (as Table2). The decline of
percentage is because the increasing of COGS and administration expense due to the
enlargement of the business in rural area. We increased the EBITDA percentage out of
revenue by 0.5% year by year.
Table 2: Forecasting of EBITDA
HK$ million
2006
2007
2008
2009E
2010E
2011E
2012E
EBITDA
193
311
183
297
482
723
1012
% revenue
2.8%
3.6%
1.6%
2%
2.5%
3%
3.5%
Source: Haier company
4.3 Depreciation
We use percentage of sales to forecast depreciation in Haier Electronics. We have data from
2006 to 2008, and get the percentage of depreciation out of sales around 1%. We use this 1%
as the benchmark and get our depreciation from 2009 to 2012 (See as table 3). We also need
to have a test to judge whether our numbers are reasonable or not. Another method is used to
forecast depreciation: the relationship with CAPEX4.
3
4
EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization.
CAPEX means Capital Expenditure.
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Table 3 Forecast depreciation in Haier Electronics
In thansand
2006
2007
2008
2009E
2010E
2011E
2012E
Sales
6,901
8,549
11,409
14,832
19,281
24,102
28,922
% of sales
1.5%
0.9%
0.8%
1.0%
1.0%
1.0%
1.0%
Depreciation
101.4
80
96.6
148.3
192.8
241.0
289.2
Source: 2009 – 2012 wash machine industry forecasting report
Here CAPEX is only the investment on fixed assets (we ignore intangible assets, because
compared with fixed assets it is tiny). The investment is related to depreciation for each year.
They are in directly proportion. The relationship is the formula as follow:
Depreciation = Investment on fixed assets - Change of fixed assets
No matter which method you choose, the results should be similar or little difference. If there
were some big difference we need to change our other numbers to converse the final results.
We use the percentage method is used as benchmark, and the other is used as a test to judge
our investment is reasonable or not, and also test the forecasting on sales. When decrease
sales, it means decrease its depreciation (the benchmark) as well. We change both CAPEX
and sales to make sure the results are approaching the same direction. When the results are
convergent, the forecasting is linked with each other by the same time.
4.4 CAPEX
Forecasting CAPEX on fixed assets is based on the change of production. Generally the idea
of forecasting CAPEX is that we need to find out the index which equals to CAPEX divided
by change of production. Here we assume that the same factor happened for water heater
industry. Under that condition, we use wash machine business as the only business Haier
have to simplify our model.
Table 4 Forecasting CAPEX on fixed assets
In million
2006
2007
2008
2009E
2010E
2011E
2012E
Total production
29.4
34.8
39.0
44.8
51.5
58.2
65.2
12%
Growth %
15.93%
13.93%
12%
15%
15%
13%
Haier China
11.2
13.6
15.6
18.8
23.2
27.4
30.7
Market share %
38%
39%
40%
42%
45%
47%
47%
Haier abroad
2.8
1.5
0.8
2.1
4.1
6.8
10.2
Sales of Haier China %
20%
10%
5%
10%
15%
20%
25%
Haier total
14.0
15.1
16.4
20.9
27.3
34.2
40.9
Change in production
2.8
1.1
1.3
4.5
6.4
6.9
6.7
Source: 2009 – 2012 wash machine industry forecasting report
According to Table 4, 2009-2012 wash machine industry forecasting:
• The average growth rate for wash machine industry is 14%. In 2007, the total production
of wash machine in China was 34.8 million. Based on that information we could forecast the
total production for the wash machine industry in China;
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
• Haier takes nearly 40% market share in Chinese market. The percentage tells us how
much wash machine Haier sold or will sell in China;
• Plus the production sold abroad, the total production sold by Haier Electronics from 2006
to 2012 is from table 4. The percentage of abroad sales in 2008 is really low due to financial
crisis. For the next 4 years it will go back to the same percentage as in 2006, even higher.
After knowing the total production, we can have numbers about change in production. We
have really number for 2006, 2007 and 2008 three years. We use CAPEX divided by change
of production for the three years get the index: 46, 85.6 and 32.4 respectively. See as table 5,
the index for 2009 to 2012, if ignored the number 85.6 and chose the number between 32 to
46, that it is reasonable for the case.
To calculate depreciation by using the formula:
Depreciation = Investment on fixed assets - Change of fixed assets
There are some change in fixed assets each year is a little higher than the test results. So we
should low down the growth rate for fixed assets from 10% to 5% to satisfy the test
requirement.
Table 5 Production change from 2006 to 2012
Capex
2006
2007
2008
2009E
2010E
2011E
2012E
128.5
95.4
43.1
157.7
242.1
277.2
299.8
6.7
Change in production
2.8
1.1
1.3
4.5
6.4
6.9
Index
46.0
85.6
32.4
35
38
40
45
Change in Fixed assets
-324.0
58.0
-16.0
37.1
62.3
42.1
44.2
Caculated depreciation
452.5
37.4
59.1
120.6
179.8
235.2
255.6
Difference
351.2
-42.6
-37.5
-27.7
-13.0
-5.8
-33.6
Source: 2009 – 2012 wash machine industry forecasting report
4.5 Change in Working capital
Here we narrow definition for working capital. According to balance sheet of Haier
Electronics:
Working capital = inventory + A/R – trade payables – other current liabilities
Table 6: Working capital change
In million
2006
2007
2008
2009E
2010E
2011E
2012E
1,446.1
Inventory
208.0
658.0
307.0
445.0
771.2
1,205.1
% to sales
3.0%
7.7%
2.7%
3.0%
4.0%
5.0%
5.0%
Account receivible
1619.0
1347.0
2398.0
3114.7
4049.1
5061.3
6362.8
% to sales
23.5%
15.8%
21.0%
21.0%
21.0%
21.0%
22.0%
Trade payables
1210.0
1032.0
1047.0
1483.2
1928.1
2410.2
2892.2
% to sales
17.5%
12.1%
9.2%
10.0%
10.0%
10.0%
10.0%
Other payables and accruals
861.0
1013.0
1543.0
1779.8
2313.7
2892.2
3470.6
% to sales
12.5%
11.8%
13.5%
12.0%
12.0%
12.0%
12.0%
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Working capital
-244.0
-40.0
115.0
296.6
578.4
964.1
% to sales
-3.5%
-0.5%
1.0%
2.0%
3.0%
4.0%
1,446.1
5.0%
Change in working capital
NA
204.0
155.0
181.6
281.8
385.6
482.0
Source: 2009 – 2012 wash machine industry forecasting report
We have actual numbers for 2006, 2007 and 2008 (Table 6). For forecasting the four items
related to working capital, we use the ratio according to sales. Because working capital is so
liquid and sensitive to sales. By using the same method, we use actual numbers as benchmark
to calculate the percentage to sales for each item. Then we give our forecasting percentage
numbers based on calculated numbers. In the end we use sales multiple the percentage to get
our final numbers.
Haier Electronics had negative working capital in 2006 and 2007. In 2008 even working
capital is positive but it only takes 1% of sales. Compared with BSH5 and Haier Group(as
Table7), working capital in Haier Electronics is really low. So for the next 5 years, it will
enlarge the investment on working capital. The percentage of sales has increased from 1% in
2008 to 5% in 2012, the inventory will be increased from 2.7% of sales to 5% of sales. But
the level of inventory in Haier Electronics is still much lower than BSH and Haier Group.
Table 7: Comparing working capital with BSH and Haier
Working capital to sales
2004
2005
2006
2007
2008
BSH
10.8%
11.3%
12.3%
12.5%
12.3%
10.9%
14.8%
8.7%
4.5%
3.3%
Haier Group
Source: BSH company and Haier company
4.6 Liabilities analysis (Leverage Ratio)
Haier Group has unusual financial debt from financial liabilities, other liabilities, net debt, and
debt to equity, and so on. It is not just much less liabilities in Haier Group, but also much less
long-term liabilities(see Table 8). Besides that, net debt and debt to equity are also discussed
here to analysis the position of liabilities in both companies.
Here we can find out that in Haier Group, net debt is positive. That means the group has
much more cash than its financial debt. Obviously that financial leverage in Haier Group is
little. A few financial debt leads a low ratio in debt to equity. Besides the high percentage of
equity out of assets, debt to equity ratio is less than 3% (except the year 2004).
Table 8: Liabilities analysis compared with BSH and Haier
Current ratio
2004
2005
2006
2007
2008
Net debt BSH (€)
-94.4
-100.0
-540.0
-299.0
-136.0
Net debt Haier (€)
5.9
54.9
132.4
210.7
228.3
Debt to equity BSH
33.0%
36.3%
41.1%
31.7%
26.7%
Debt to equity Haier
10.6%
2.1%
3.1%
1.6%
2.4%
5
BSH: Bosch Siemens Hausgräte, a joint venture between Robert Bosch GmbH and Siemens AG since 1967,
the third largest home appliances manufacturer in the world.
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Conclusions
Based on the above case analysis, we know that Haier company has the competitive strategy
by the finance advantage under the finance crisis. Haier group is still a very young company
that the growth rate keeps over 25% (except 2008 the growth rate was only 3.2%, but the
performance in 2008 was the best for last 4 years). The Group still needs to improve its grow
margin and EBIT6 margin. Controlling the cost is the way for bigger profit in the future.
Exchange lose in 2007 and 2008 has increased a lot due to RMB appreciation. Choosing the
correct and suitable finance deviation is very important for Haier Group. Stable financial
rates are hard to be done by a fast growing company. But it does not mean the company can
ignore satiability of among numbers. Especially working capital and the efficiency of cash
and inventory are the top issues for a manufacture company. Stated oriented company is easy
to lose the sensitive of market oriented. The low percentage of equity and the high percentage
of current liabilities are not the healthy structure for a multinational company.
There also have some other competitive advantage for Haier. First, everything produced
inside the company is good for the company development because the company do not need
to depend on any other suppliers. Second, the cost of machine components is also lower than
other competitors if everything is provided by associated group. Third, reducing the
percentage of equity is also important not just for Haier Group, but also for other Chinese
companies. Haier’s domestic competitors like Gree and Hisense, both of them have high
range of equity out of total liabilities. They should know that suitable liabilities will low
down the cost of capital. The efficiency of equity is also important for companies.
We always say that “the opportunity only gives human who has the preparation, the
opportunity also only gives has the preparation country”, the international finance crisis have
impacted on the entity economy, the Chinese Enterprise resists the international economy
risk ability is the strengthening greatly, hopefully much more company like Haier will under
the press to find out the opportunity to implement its competitive strategy, and get its
advantage to develop after-finance crisis.
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3rd Ed. John Weilly & Son, Hoboken, NJ: 105-115.
6
EBIT: Earnings Before Interest and Tax
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What Others Manifest? The World Economy in the Theoretical Turbulence of Global Fiancial Crisis
Nir KSHETRI
Bryan School of Business and Economics
The University of North Carolina--Greensboro
[email protected]
HOW EMERGING ECONOMIES REBOUND FROM THE GLOBAL FINANCIAL
CRISIS: EVIDENCE FROM CHINA AND INDIA
Abstract
China and India are recovering from the financial crisis more rapidly than industrialized
countries. Because of differences in their economic, cultural, historical, social and political
backgrounds, China and India have exhibited noteworthy differences in terms of the impacts
of the global financial crisis (GFC) and their resposes to the GFC. The proposed article
identifies very clear contexts, attendant mechanisms and processes associated with an
emerging economy’s rebounce from the GFC.
Keywords: Global financial crisis, subprime debt, emerging economies.
1. Introduction
China and India are recovering from the financial crisis more rapidly than industrialized
countries (Kane, 2009). In August 2009, the PC maker, Dell, announced that increasing
demand from China and India would lead to a growth in the company’s revenue starting
2010 (Reuters.com, 2009). Growth rates have accelerated in both economies.
Because of differences in their economic, cultural, historical, social and political
backgrounds, China and India have exhibited noteworthy differences in terms of the impacts
of the global financial crisis (GFC) and their resposes to the GFC. For instance, Arvind
Subramanian of the Washington, DC-based Peterson Institute for International Economics
attrbutes India’s resilience and rebounce to what he refers as the "goldilocks globalisation"
(Economist, 2009a). Compared to many economies in Eastern Europe, India’s dependent on
foreign capital has been relatively low. Likewise, compared to some East Asian economies, it
relies less on foreign trade. China is more globalized than India (Table 1).
Prior research indicates that developed economies rise and fall around the same time, and
emerging markets also reach a peak or a trough almost simultaneously (Kose et al., 2008).
However, emerging and developed nations’ business cycle phases are not in necessariyl
concord. Notably lacking from this literature, however, is explicit attention to the process
associated with the effects of GFC on an emerging economy. Little theory or research exists
to explain how structural and business cycle dynamics affect the rise and fall of emerging
economies. The goal of the proposed article is to identify very clear contexts, attendant
mechanisms and processes associated with an emerging economy’s rebounce from the GFC.
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2. The effects of GFC on China and India
China's current account1 surplus dropped from US$191.72 billion in the first half of 2008 to
US$130 billion for the first half of 2009 (Wu, 2009). This was the first decline since 2004.
Likewise, in the first half of 2009, the capital and financial account surplus declined to
US$33.14 billion compared to US$71.93 billion in the same period in 2008. Most of the
decline can be attributted to net direct investment, which reduced to US$20.57 billion in the
first half of 2009 from US$40.75 billion in the same period of 2008 (Wu, 2009). It is
estimated that 22 million migrant workers lost their jobs in China (Jia, 2009). Note that
migrant workers in China account for most of the workforce in the labor-intensive industries.
India’s exports to its major exports markets such as the US and EU have declined
substantially after October 2008 (ibtimes.co.in, 2009). According to an estimate of the
Government of India's Labor Bureau which conducted a survey in January 2009, half a
million jobs were lost during October-December 2008 in the country. Subsequent surveys by
the Bureau in January-March and April-June, 2009, reiterate the overall declining trend in
employment. Obviously, India’s export sectors were more affected than other economic
sectors. About 167,000 workers lost jobs in the export sectors during April-June 2009
(Prabhu, 2009).
Government measures
China's stimulus package was worth US$586 billion (four trillion yuan), which has
stimulated bank lending and led to an increase in prices of shares and commodities. Analysts,
however, debate over what proportion of China’s stimulus package is new money (Klein and
Cukier, 2009). The country also raised the rebate on the export tax for labor-intensive
products. Most of that bank lending in China has been spent in commodities, construction
and other assets that are vulnerable to falling prices (Fisher, 2009).
Likewise, Indian Finance Minister Chidambaram announced his country’s plan to speed up
market overhauls, construction, and infrastructure improvements (Narasimhan, 2009). Indian
government also a announced new foreign trade policy, which focuses on expanding exports
to the emerging economies in Africa, Latin America, Caribbean, East Asia, Oceania and the
Pacific. These economies are less affected by the GFC (ibtimes.co.in, 2009). The government
knew full well that it is difficult to increase exports to the US and Western Europe. The new
policy gave incentive of 2.5-3 per cent on exports to countries such as Algeria, Egypt, Kenya,
Nigeria, South Africa, Tanzania, Brazil, Mexico, Ukraine, Vietnam, Combodia, Australia and
New Zealand (The Economic Times , 2009a).
Are China and India Rebounding from the Economic Crisis?
A number of indicators point to the fact that China and India are rebounding from the
economic crisis. In August 2009, Hewlett-Packard reported a double-digit revenue growth in
China (Schwartz, 2009). The U.S. exports to China increased to US$5.5 billion in June 2009
from US$4.1 billion in January 2009. In the first half of 2009, new loans issued by Chinese
1
It includes trade in goods and services.
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banks amounted US$1.1 trillion (Schwartz, 2009). The Shanghai stock market increased by
86% in the first half of 2009 (Fisher, 2009).
While there were concerns about a decline in electricity demand in many parts of China
(Fisher, 2009), more recent data indicate that electricity consumption has increased (Altman,
2009). Overall, retail sales in the country increased by 15 percent in the first half of 2009.
The growth in the sales of consumer goods, which slowed to 11.6% in February 2009,
increased by 15.2% in July 2009 (Cheng, 2009). Especially, sales of textiles, cement, soft
drinks, tractors and automobiles grew at double-digit rates (Fisher, 2009). Citigroup’s recent
increase in its estimate for Chinese economic growth to 8.7% for 2009 (from 8.2 percent),
and to 9.8 percent for 2010 (from 8.8%) reflects this optimism.
India’s economy is also rebounding (Table 1). According to a survey of the global
consultancy firm, Nielsen, consumer confidence (in terms of job prospects, personal finances
and willingness to spend) in India registered a 13-point rise during March-June 2009 to reach
at 112. India was the world’s second most optimistic nation after Indonesia (Xinhua, 2009).
3. Possible Channels of the GFC’s Impact on Emerging Economies
According to Gersbach (2002, p.209), globalization can be measured “ by the intensity of
contacts through trade and foreign direct investment”. More broadly, the Globalization Index
(GI), developed by Foreign Policy and A.T. Kearney provides a helpful perspective to
understand factors contributing to global integration of economies (Foreign Policy, 2007).
Specifically, the GI has four dimensions: economic (trade and FDI), personal (telephone
calls, travel and remittances) technological (number of Internet users, hosts and secure
servers) and political (foreign aid, treaties, organizations, and peacekeeping). Overall,
possible channels of the GFC’s impact on economies like China and India can be examined
in terms of three challenges: Financial and investment related challenges, trade related
challenges and consumer confidence related challenges (Foreign Policy, 2007; Gersbach,
2002; Jha, 2009). Figure 1 compares China and India’s responses to these challenges
associated with the GFC.
Financial and investment related challenges
The degree of cross-border capital flow is probably the most important measure of financial
globalization (Lowe, 2007). During the pre-GFC era, “an unusually benign economic
climate” became an important driving force behind a rapid growth of the cross-border
investment capital markets (The Economist 2007).
In this regard, it is important to note that America and Europe account for an estimated fourfifths of the world’s investment-banking revenues (The Economist 2007). While banks in
Western European countries are exposed to the risky subprime U.S. debt (Schwartz, 2009),
major Indian banks did not have direct exposure to such debt (Jha, 2009; Thomas, 2007).
Likewise, China’s financial system is fairly insulated and bank-financed investment growth
has dominated GDP growth in the country ( Prasad, 2009; Altman, 2009). However, in 2007,
Bank of China confirmed that it was holding US$9.7 billion of securities backed by
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American subprime loans. Two other Chinese banks, Industrial and Commercial Bank of
China and China Construction Bank also reported such exposure of a billion dollars each.
The three Chinese banks’ US$12 billion exposure to subprime was 6% of the US$199 billion
in private foreign securities they held (Thomas, 2007). In March 2008, the Central Bank
Governor of China, Zhou Xiaochuan noted that there will be a limited effect of US led
subprime debt crisis on the Chinese banking system. He, however, pointed out that there will
be an indirect effect the US led subprime mortgage crisis on the Chinese economy (York,
2008). The Chinese government also confirmed that its foreign reserves hoard is not directly
exposed to the subprime debt (Thomas, 2007).
Capital flows tend fall when world economic growth is lower (Lowe, 2007). India’s growth
is largely based on domestic investment (Jha, 2009). Indian businesses are receiving loans
from India's state banks, which account 70% of bank assets in the country (Economist,
2009a). State Bank of India is the country's largest lender. According to the July 2009 issue
of The Banker, a Financial Times publication, SBI is the world’s 64th largest bank (76th by
asset). As of March 2009, SBI had 12,100 offices worldwide, over 150 million customers, a
capital reserve of more that US$ 12 billion and a total business of US$ 273.61 billion
(including deposits and advances) (Ramavarman, 2009). Domestic savings have also been an
important source of investment.
Trade related challenges
Comared to Hong Kong and Singapore, which are the top two performers in the economic
category in the GI (Foreign Policy, 2007), India’s economic globalization has been at a
smaller scale. Singapore's external trade (import plus export) is 360% of GDP and Hong
Kong’s 350% of GDP (Yew 2009). Indeed, India’s export as a percentage of GDP (14.5%) is
lower than that of China (33.0%) Indonesia (26.8%), Japan (16.0%), Malaysia (89.6 %)
Singapore (185.2%), South Korea (45.4%), Taiwan (64.8%) and Germany (39.9%) (Yew
2009). India’s growth is largely based on domestic consumption (Jha, 2009). China has
introduced programs to encourage a transition from an export-led to a consumption- led
growth.
According to Goldman Sachs’ estimates, a 1% drop in US consumption growth, China’s
growth will decline from 12.3% per annum to 10.9%. In the case of India the corresponding
impact would be even lower, estimated to be a GDP drop of between 0.15% to 0.25%.
Industries in a developing economy, however, differ in terms of their exposure to
industrialized countries (Gersbach, 2002). In this regard, India’s outsourcing industry is more
directly affected by the GFC. That being said, it is also the case that the IT sector accounts
for only 5.4% of the country’s GDP and thus the impact of offshoring on the overall
economy would be limited (Thomas, 2007).
Consumer confidence related challenges
In a discussion of consumer confidence related challenges in emerging economies such as
China and India, remittances deserve special attention. A commonplace observation is that
than compared to other kinds of financial flows, remittances are less affected by economic
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conditions in a recipient country. According to this view, remittances are sent mainly to
support the sender's family instead of expectation of economic returns. On the whole,
anecdotal evidence suggests that remittances tend to fall less in response to economic
downturns in the receiving country than investment flows do. (Economist.com, August 17
2009).
In this regard, it is important to note that India receives more remittances than any other
country in the world (The Economic Times, 2009b). Nobel Laureate James Mirrlees noted:
"As things stand, India receives a huge quantum of remittances from Indians living and
working in the Gulf region. And, the Gulf area has still not been impacted hugely by the
recession. Therefore, one doesn't expect remittances into India to drop immediately from
Gulf Indians" (Nag, 2009). Likewise, remittances from from overseas Chinese grew in 2007
by 35.2% and in 2008 by 23.2% (ChinaStakes.com, 2009). Remittances in China are about
1% of the GDP.
There are, however, reasons to believe that economic and financial risk and return-related
considerations such as expectations in domestic asset markets, expectations related to
exchange rate fluctuation and benefit from interest rate arbitrage opportunities may have
driven the big jumps in China’s and India’s remittances in 2008. It is suggested that factors
such as a weak rupee and higher interest rates in India compared with industrialized countries
are driving force behind the dramatic increase in the flow of remittances to India
(Economist.com, August 17 2009). Likewise,